Information from the Washington State Department of Financial Institutions

The Basics of How Debt Consolidation Works

How Debt Consolidation Works

When you consolidate your debt, you are taking out a new loan or credit card. Your debts are rolled into one monthly payment and you must make payments just like any other loan.

Questions To Ask Yourself When Considering Debt Consolidation

  • Will it lower the total amount I have to pay?
  • Will my monthly payments be lower?
  • Will I have to pay for a longer amount of time or shorter amount of time?
  • What fees are associated with the debt consolidation?
  • How long does the interest rate last for?

Credit Card Balance Transfers

Many credit card companies offer zero-percent or low-interest balance transfers that allow you to consolidate your debt onto one credit card.

Things to keep in mind:

  • The promotional interest rate for most balance transfers lasts for only a limited time.
  • You may not be able to transfer your entire balance.
  • If you’re more than 60 days late on a payment, the credit card company can increase your interest rate to the penalty APR rate.
  • You may have to pay a balance transfer fee.

Debt Consolidation Loans

Banks, credit unions, and other lenders offer debt consolidation loans. These loans consolidate your debts into one loan payment.

Things to keep in mind:

  • Many of the low interest rates for debt consolidation loans may be "teaser rates" that only last for a certain time.
  • The loan may include fees or costs.
  • Although your monthly payment might be lower, it may be because you’re paying over a longer time. This could mean that you will pay more overall.

Credit Counseling

Credit counseling agencies work with you to solve your financial problems. These organizations offer services through local offices, the internet, or via phone.

Credit counselors will discuss your financial situation with you, and help you develop a personalized plan to solve your money problems. Counselors typically negotiate lower payments with your creditors, and then make payments using money you send them each month.