What is Debt Consolidation?

Young couple considering debt consolidationDebt Consolidation is the process of combining multiple debts into one single payment with the overall goal being to lower monthly payments and create a more manageable and secure financial situation.

Different Ways to Consolidate Your Debt

There are two main ways to consolidate debt. One type requires you to apply for and receive a consolidation loan to replace all past debts and bills. Your past creditors will be paid and you will now owe a monthly payment to repay your new balance with the consolidation company who supplied your loan.

The other type is carried out through a debt management program (DMP). In this scenario, an account will be created to keep track of all the balances owed to current creditors. Prior to beginning repayment, a credit counseling agency (CCA) will negotiate with creditors to reduce interest rates and settle on manageable monthly payments. Once these are set, all payments are totaled and this amount is withdrawn from a client’s personal bank account as one single monthly payment. The debt management company will then pay all creditors listed on the account. In simple terms, a client will be consolidating multiple payments to creditors into one low monthly payment to be disbursed to creditors through this service.

Debt Consolidation Loan vs. Debt Consolidation Programs

What are the differences?

Consolidation loans offer a quick fix solution and temporary relief by replacing multiple debts with one new loan. While they can feel as though they reset your finances and give you a fresh start, loans have some disadvantages that are difficult to overlook.

Because this type of debt consolidation requires a loan, it may only be an option for those that can qualify for borrowing. There’s no guarantee of approval or that if approved, the amount will be large enough to cover all outstanding balances the client possesses. If you can secure a loan, you may be looking at a high-interest rate and longer repayment term. This solution ends up taking longer than other options. Lastly, pursuing a loan may resolve your current financial problem, but does little to prevent the recurrence of debt.

In comparison, consolidating debt through a credit counseling agency’s DMP comes with far less strict qualifications. Anyone whose situation does not qualify them for bankruptcy alone or who can realistically afford a monthly payment can take advantage of a DMP. This repayment method will include lowered interest rates than those a client would have on their own and all debt would be paid within a five year period. One of the more underrated benefits of pursuing consolidation through a credit counseling agency is having access to financial education. Clients can gain insight into budgeting, saving, and improving their credit score and report.

Comparing Debt Consolidation Loans with Debt Management Programs


We Can Consolidate Your Debt TODAY – Without a Loan!

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There is ZERO cost or obligation to you, and NO negative effect on your credit score.

  • Discover how we can Consolidate Your Debt into one easy monthly payment without a loan.
  • Learn about your debt relief options.
  • Reduce interest rates and stop late & over-limit fees.
  • STOP the collection calls.
  • By clicking “Submit” I consent to receive calls, emails, and text message offers/information from Debt Reduction Services, Inc. using an autodialer/pre-recorded message at the number I provided. I understand that msg/data rates may apply and that my consent to such communications is not a requirement for purchase.


Debt Consolidation vs. Debt Settlement, Bankruptcy, or Balance-transfer Cards

Because of a growing need for debt relief, many options are available on the market today. However, not all may be as beneficial or as reliable as debt consolidation. Alternative options include debt settlement, bankruptcy, balance transfer cards, and pursuing a personal or payday loan. Below are some brief pros and cons of each.

  1. Debt Settlement: Debt settlement companies may be able to negotiate with creditors to reduce your total balance owed. You may feel relieved to pay back far less than you actually charged. Unfortunately, this savings is often equal to the fees debt settlement companies require for their services. What’s more, these companies have yet to show consistent success meaning you could pay thousands in fees and be left with just as much debt as you started with. Worse than this, strategies currently used by debt settlement companies have sometimes ended in costly lawsuits against those seeking debt relief.
  2. Bankruptcy: Bankruptcy can clear individuals of oppressive debt and provide somewhat of a fresh start. This method of debt relief, however, is a major mark on your credit history and is the most damaging option to your credit score. Additionally, a noteworthy amount of bankruptcy filers find themselves filing a second bankruptcy later on because of unchanged behaviors and spending. Bankruptcy also does resolve student loan debt. For these reasons, bankruptcy should be a last resort.
  3. Balance Transfer Cards: Balance transfer cards can offer short-term relief for small amounts of debt. By transferring debt (sometimes for a fee) to these credit cards, you are able to ditch your current high-interest rates for 0% APR for a limited set amount of time. This may provide the time necessary to pay off your debt before you are subject to an interest rate equal to or greater than the one you had hoped to escape. Balance transfer cards can help to reduce the amount you would have paid in interest; however, they do not in any way reduce your current balance. They are considered somewhat risky since they do not address the cause of your debt accumulation, leave you with an opportunity to charge more debt, and can sometimes require the balance to be paid in full once their initial promotion ends.
  4. Refinancing: When refinancing their home, some individuals choose to increase their mortgage loan to cover and pay their credit card debt. It is a high risk since secured debt is being acquired in place of unsecured debt. It can or should only be considered an option if the homeowners have more equity in the home than what is owed and if the home still has a positive market value.

What is the best way to consolidate debt?

Utilizing a debt management plan is typically the best method of repaying debt for the majority of individuals. It is highly accessible and can be accomplished with the least amount of money in the least amount of time. It is a fairly comfortable process as terms of the program will be discussed and settled upon with interested candidates. As an enrollee, you will also benefit from having credit counselors and service representatives to answer questions and guide you through the process all along the way. You will not only be informed of the progress toward becoming debt free, but you can also receive beneficial information regarding other areas of your financial health. Credit Counseling Agencies may provide the best route because they offer the most holistic approach.

What type of debt can you consolidate?

Credit card debt is most commonly addressed through debt consolidation. However, all types of unsecured debt can be managed including past medical bills, debt in collections, personal or payday loans, and repossessions. Mortgages, car loans, or home equity lines of credit are all secured debts and cannot be enrolled in a debt management program.

Examples of Unsecured and Secured Debt

Why Choose Debt Consolidation?

Working with a nonprofit credit counseling organization such as Debt Reduction Services can save you money over time, develop a long-term solution, and is effective because of adherence to governmental regulations.

  1. Is it right for you?
    Some indicators that you should consider debt consolidation include your expenses often exceeding your income, feeling reliant on credit cards or payday loans or your payments toward debt are taking more and more of your monthly budget. If you are worried your debt is getting out of control and are committed to paying it in full, then taking action sooner rather than later can save you money, time, and hassle. Consolidating your debt may be the best way to do so if you are battling growing balances, have high-interest rates or unmanageable monthly payments, or are frequently contacted by creditors attempting to collect on your debt. To successfully achieve debt relief through debt consolidation, you must be willing to provide necessary documents relating to your debt, revise current spending habits to create room in your budget for one monthly payment, and cease most credit usage for the length of your repayment plan.
  2. Do you qualify?
    Unlike a debt consolidation loan, a debt management program does not have any financial qualifiers. Anyone can take advantage of this type of program. However, if your combined debt falls under $1,000, your best option is to repay the debt on your own. A consultation, during which a nonprofit credit counseling agency reviews your finances, can help you create a debt repayment strategy. Debts amounting to more than $1,000 can be more difficult to overcome and are a good time to seek additional help. This can be a real solution for relief for anyone carrying debt as small as $1,000 even up to hundreds of thousands of dollars. The best way to determine your eligibility and best debt repayment option is to arrange an appointment with a certified credit counselor who can thoroughly assess your individual financial circumstance.
  3. When is it not the best option?
    No matter the option you choose, it is important to weigh your investment of money and time with the results you are being guaranteed. Make sure these costs will be worth the outcome. For example, if you can repay your debt on your own, seeking a service to do so for you is not a good financial investment. Generally, other options such as bankruptcy may be better for individuals who do not have the ability to meet the financial obligations of a debt management plan because of a lack of steady employment, an insurmountable sum of debt, or because creditors have moved beyond negotiation. While debt consolidation may not always be the best match for you, debt settlement, balance transfers, car title loans, and home equity lines of credit can come with a high cost and be ineffective or create even more debt. Therefore, we do not recommend them as helpful alternatives. We would advise, again, that individuals researching their options attend a free consultation through a credit counseling agency to accurately understand how they can take advantage of the many resources offered.

How do you consolidate credit card debt on your own?

If your financial debts are fairly insignificant, you feel confident you can develop a repayment strategy, and you are ready to maintain the discipline necessary to pay your debts off on your own, your first step would be to gather creditor information and current balances for each account owed. It is wisest to choose one place to compile all your data such as a spreadsheet, whiteboard, or journal. You’ll want to list out your debts including the account name, the interest rate, the current balance, the minimum payment required, and the payment amount you’ve determined to pay. The order of this list will be based on which repayment strategy you feel will benefit you the most. Take a moment to review these tips if you are uncertain what options are available or what each one entails. Begin making monthly payments to each including one larger payment to the highest priority account. Be sure and verify monthly remaining balances with your creditors and write in these new balances wherever you are tracking progress. Once an account has been paid in full, it is important to reassign its payment to the next account with high priority. This aggressive approach is proven to be successful.

  1. What should you do to stay out of debt?
    The surest way to eliminate debt on your own is to combine an aggressive repayment strategy with a simplified budget. During your repayment process, it would be best to freeze all credit card usage or borrowing. You’ll find it nearly impossible to conquer a balance if you continue to add to it. Next, track your expenses every month. Do this to understand how much money is coming in and where every dollar goes when it leaves your bank account. Consider your purchases and weed out any unnecessary spending. Usually, you can modify spending on utilities, TV subscriptions, gas or transportation, clothing, groceries, dining out, and entertainment. Freeing up this money will create room for the necessary payments needed to get out of debt. This revised way of living will also ensure you will be able to save for medical and other financial emergencies and be less reliant on credit usage and borrowing on a daily basis.

Debt consolidation benefits

  1. How it works
    Debt consolidation allows a client to pay down multiple accounts owed with one monthly payment. At Debt Reduction Services, clients first meet with a certified credit counselor to better understand their finances and assess their eligibility for a debt repayment program. Once repayment is determined to be feasible, negotiations with creditors are pursued by either the client or the credit counseling agency. Counselors and clients will discuss a repayment plan. Should the client agree to the terms, they will be enrolled in a DMP through which they will make one low monthly payment to be disbursed to their creditors. A client’s repayment process will last 5 years or less. During repayment, clients will be encouraged to review financial education webinars and articles provided.
  2. How it can help
    This easy approach provides clients with honest counsel, organization, and accountability, three keys to success. Debt Reduction Services is also able to offer help in reducing fees and interest rates, as well as supply financial education and informative support, to guide clients along the way. Utilizing a debt management plan is unequivocally useful because it simplifies the process of repayment, supplies a proven method for success, and saves clients up to thousands of dollars in reduced fees, charges, rates, and because it often shortens repayment terms.
  3. Example
    It’s easiest to visualize the impact if we use an example. If for instance, you attempted to repay $20,000 worth of debt on your own, after fees, interest, and a drawn out repayment period possibly as long as 20 years, it is likely you would have paid $60,000 in total. If however, you apply consolidation along with lowered interest rates, even with program fees included, after five years your debt would be paid in full totaling only $23,000.
  4. What Debt Repayment Can Help You Do
    Aside from finding relief from paying off oppressive debt, consolidating your bills and completing a debt management program comes with several other benefits. As you pay off your creditors on time and according to terms, these acts will be reported to the credit bureaus. This, in turn, will improve your credit score. Additionally, even in the process of whittling down your outstanding balances, you will be working towards a healthier debt-to-income ratio. Individually or combined, these benefits can improve your chances of being approved for a car or home loan should that be a goal for your future.

Couple considering debt consolidation options

Debt Consolidation FAQs

What is the difference between a Debt Consolidation Loan and a Debt Management Program?

These types have two main differences. When enrolling in a debt management program, no loan is needed. The client agrees to pay the debt management company (or credit counseling agency) one payment that will be passed along to all accounts enrolled in the program. In contrast, a consolidation loan is offered through a company that specializes in this form of debt management. The client’s multiple accounts will be paid with this one loan and the client will then make a monthly payment to the company to repay the loan.

They also differ in that a debt management program is typically done through a nonprofit credit counseling agency and includes financial education to ensure the client is empowered to make healthier decisions for financial stability long after they finish repaying their debt.

What is unsecured debt?

Unsecured debt refers to debt that is not backed or attached to any form of collateral including credit card and medical debt, bills in collection, etc. On the other hand, secured debt includes mortgage and car loans in which case, should a borrower be found incapable of repayment, assets can be repossessed or ceased.

Is Debt Consolidation bad for my credit score?

Participating in a debt management program in order to consolidate your debt does not directly affect your credit score. A temporary note may be made on your credit report by your current creditors. This simply informs other creditors of your attempt to repay your debt and discourages them from issuing you any new accounts, lines of credit, or loans that may detract from your efforts. Once you have completed the DMP, this notation is required to be removed. In certain circumstances, when a client enrolls in the DMP and either they or their creditors’ close credit accounts, the client may see a short-term drop in credit score partly due to a change in the ratio of current balance to available credit limit. However, this dip is quickly recovered because of on-time payments which lower debt owed.

Does Consolidation work on a limited income?

Because qualifying for a loan is typically based in part on income, acquiring a consolidation loan could be difficult on a limited income.

However, consolidating debt through a debt management program requires no minimum income. Aside from a complete inability to pay, credit counseling agencies are willing to work with most incomes to create affordable payments and program participation.

Which plan is right for me?

Both consolidation loans and debt management programs negotiate down the total debt repaid by fighting for lowered interest and eliminated fees or charges. Both methods also promise a repayment plan that lasts 5 years or less. If you feel comfortable applying for a loan and can qualify, then a loan is not beyond consideration. If however, you feel your income is inadequate, your debt is too large for a loan, or you feel access to financial education would be uniquely beneficial, then a debt management program may be the more favorable option. More information can be provided to assist with your decision by scheduling free consultations with the companies under consideration.

Do lenders perceive Consolidation negatively?

While lenders may be temporarily deterred from lending to someone who has consolidated debt because of closed accounts or credit report notations, these marks will fade, never lasting longer the repayment program itself. Lenders then will be more willing to offer credit or loans due to increased credit scores. Many clients are even able to purchase homes shortly after completing their debt repayment.

How long does will it take?

Working with a loan or debt management program on average takes between three and five years to repay. Nonprofit credit counseling agencies are in fact required by various regulations to develop a plan for clients to be debt free in five years or under.

How do I sign up?

Before signing up for any kind of relief, you should seek a financial consultation with the companies you are considering. Making a free appointment with a certified credit counselor through a nonprofit organization is the best place to start. During this initial meeting, your credit counselor will review all documents relating to your financial situation. They will be able to detail possible debt repayment options as well as address any concerns you may have regarding your current circumstance. Once you’ve been deemed eligible, the counselor will openly discuss the terms and parameters of the program. Finally, should you chose to enroll, you will be guided through the next steps.

Common Terms

Debt Consolidation: The process of condensing multiple payments towards numerous accounts into one monthly payment to pay off debt.

Debt Consolidation Loan: One type of consolidation in which a loan is acquired to pay off existing debt and monthly payments are redirected to pay back the new loan.

Credit Counseling Agency:  This most often refers to a nonprofit organization that strictly adheres to government standards in business practices as well as provides clients and local communities with free access to financial education and related resources.

Debt Management Program: A program often offered through a credit counseling agency in which clients pay a one-time enrollment fee and from then on make low monthly payments. These payments are disbursed to creditors in amounts agreed upon and also go toward covering the cost of account maintenance.

Unsecured Debt: Debt which has been extended without secured collateral. This usually includes credit card debt, medical debt, payday or personal loans, utility bills, and debt in collections.

Secured Debt: Debt which has been extended with secured collateral typically including mortgage or car loans, home equity lines of credit, or title loans. In this instance, if a debt goes unpaid, repossession or seizure of assets is contractually acceptable.

How to Prepare to Speak with a Debt Consolidator or Credit Counselor

Whether you set up an appointment online or over the phone, there are usually a few things you can do ahead of time to have a more successful consultation. You’ll first want to gather a variety of financial documents. This includes your bank, credit card, and medical bill statements, account transaction histories, and loan contracts and current balances as well as any attempts on the part of companies or institutions to contact you regarding your debt. You will also want documentation on your income and have a solid understanding of your expenses and spending behaviors. Be sure and ask the company you are meeting with if they have any forms that would detail what you will be covering in your appointment. They should have a method for easily organizing the requested information. Finally, consider your short and long term goals and be prepared to discuss these with your counselor. Knowing what you are trying to accomplish will help your counselor determine if consolidation is the right option for you.

Recap: What is Debt Consolidation?

Debt consolidation definitionThe definition of debt consolidation would be: The act of consolidating several debts and financial obligations into one. The simplest explanation of debt consolidation would be to describe it as turning several monthly payments into one payment per month.

There are many reasons as to why a person may want to consolidate their debt. These reasons range from wanting to secure a lower cumulative interest rate, to avoiding bankruptcy. There are two distinct types of debt consolidation; With or Without a loan.

Debt Consolidation With a Loan

A debt consolidation loan is an act of taking out one loan to pay several smaller loans, preferably at a reduced interest rate from the rates of the smaller loans, since many credit cards have interest rates in the teens to the high twenties in terms of percentage points. In some cases, due to the interest rates being lower, individuals may obtain a smaller monthly payment.

Debt Consolidation Without a Loan

Usually accomplished through a debt consolidation plan, also known as a debt management plan (DMP), offered by credit counseling organizations. The primary focus of these plans are to obtain reduced interest rates on an individual’s credit cards and other unsecured debt. Another common goal of debt consolidation is to lower the overall monthly payment in order to provide immediate relief to the individual. Lower payments can typically be obtained due to the interest rate reductions that many creditors provide.

The types of debt credit counselors may work with include but are not limited to, credit cards, collection accounts, personal loans, payday loans and other unsecured debt.

A home loan or an automobile loan would be considered secured loans; therefore a credit counseling agency would not be able to obtain reduced interest rates or payments due to the loans being secured with collateral.

Alternatives to Debt Consolidation

There are essentially three alternatives to debt consolidation. Each comes with differing benefits to the consumer and provides different risk versus reward scenarios.

Debt SettlementDebt Settlement or Debt Negotiation

In this scenario, you would stop paying your bills altogether. These may be the most prominent ads currently. The draw is that you can simply stop paying and save upwards of 60% or more on your debt. The reality is that by not paying your bills your credit rating becomes trashed. In some cases, a creditor can still sue for the unpaid amount. Another worrisome problem is that there have been unscrupulous debt settlement outfits that have defrauded their clientele.


Your credit score may take a heavy hit, but if you can file for a chapter 7 bankruptcy, you may be able to get your unsecured debt cleared. This can help provide a fresh start and put you back on track to restoring your credit rating. In some instances, where an individual is truly unable to repay their debt, filing bankruptcy may be in an individual’s best interest.

Payment PlanCreating Your Own Payment Plan

In many cases, by making personal sacrifices and budget adjustments, an individual may find themselves better off by developing their own payment plan. It is important to attempt to pay back more than the minimum monthly payments owed in order to get ahead. If the bills are already in arrears it may be difficult to overcome the late and over limit fees along with the higher interest rates. Creating your own payment plan works best when accounts are current.

*Debt Elimination (not a true alternative)

Watch out for this one. Although not a true alternative to debt consolidation we’ve decided to address it. Undoubtedly you’ve seen advertisements that claim they can easily erase your debt for a lump sum payment. Many of these ads are seen hidden in the corners of the internet and out of scrutiny. We recommend ignoring those ads and spam messages and seeking a safer and working, alternative.

Additional Information: Knowing When to Seek Help

Debt Consolidation Tips

Tips to Help You Stick to Debt Consolidation


We Can Consolidate Your Debt TODAY – Without a Loan!

Get a FREE Debt Consolidation Consultation

There is ZERO cost or obligation to you, and NO negative effect on your credit score.

  • Discover how we can Consolidate Your Debt into one easy monthly payment without a loan.
  • Learn about your debt relief options.
  • Reduce interest rates and stop late & over-limit fees.
  • STOP the collection calls.
  • By clicking “Submit” I consent to receive calls, emails, and text message offers/information from Debt Reduction Services, Inc. using an autodialer/pre-recorded message at the number I provided. I understand that msg/data rates may apply and that my consent to such communications is not a requirement for purchase.


Further Credit & Debt Related Information:

Dealing With Debt – Learn about common debt problems, including filing for bankruptcy by USA.gov

Coping With Debt – A consumer information resource by the Federal Trade Commission

Debt Consolidation Calculator – A useful debt consolidatoin calculator by Bankrate.com

Free Personal Finance Education – Personal Finance Education materials for all ages provided by DebtReductionServices.org