How Does Debt Consolidation Work?

By Jennifer Tucker
October 24, 2023 | 5 Min. Read

If you’ve found yourself drowning in a sea of bills, loans, and credit card statements, you’re not alone. Many people face the daunting challenge of managing multiple debts, each with its own interest rate and repayment terms.

Fear not, debt consolidation could help you out. Whether you’re just starting to explore debt consolidation or you’re looking for a deeper understanding of how it works, you’ve come to the right place. In this blog, we’ll discuss debt consolidation, breaking down what it is, why it’s important, and whether it’s the right solution for you.

What is Debt?

Let’s start with the basics. Debt is when you owe money to someone, like a friend, family member, or even a bank. It’s borrowing money with a promise to pay it back later.

When you borrow money, you usually have to pay back not just the money you borrowed but also a little extra called “interest.” Interest is a fee for borrowing money that compounds over time. As time goes on, you might realize the different types of debt you have contribute to your overall credit score and monetary liabilities. This is where debt consolidation comes into play.

How Does Debt Consolidation Work?

Imagine you have different pieces of a jigsaw puzzle, and each piece is a debt, like money you owe to a credit card company. Debt consolidation is like getting a super-sized puzzle piece (a loan) that helps you put all those smaller pieces together in one place. So instead of dealing with lots of debts, you’re dealing with just one!

These loans are beneficial for people who have a variety of credit card balances, numerous personal loans from lenders, or numerous high-interest loans (according to Forbes Advisor).

Consolidating debts is important because having several loans with unpaid sums might harm your score. These elements could lower your credit score, increase your debt-to-income ratio, and increase your risk of missing payments if you have several to pay. Another issue is that you can end up paying more in interest over time if you have multiple loan amounts.

What Are the Different Types of Debt/Loans?

Debt comes in different shapes and sizes. Here are a few common types:

Credit Card Debt

When you use your credit card to buy things but don’t pay the full amount when the bill comes, you owe the credit card company.

Student Loans

These are loans to help pay for college or other types of education. You borrow money to pay for your education and then repay it later.


If you buy a house, you often take out a big loan called a mortgage to pay for it. You pay it back over many years.

Personal Loans

These are loans you can use for almost anything, like a car, or even to consolidate your debt.

How Do You Consolidate Debt?

Here’s a quick rundown of how debt consolidation works:

Gather Your Debts

First, you need to make a list of all the debts you have, like credit card balances, personal loans, student loans, or any other money you owe.

Get a Consolidation Loan

Next, you apply for a special loan called a debt consolidation loan. This loan is designed to pay off all your smaller debts with one larger loan altogether.

Pay Off Smaller Debts

Once you have the consolidation loan, you use it to pay off your credit cards and other debts. Now, you only owe money on the consolidation loan.

Single Monthly Payment

Instead of making lots of different payments each month, you make just one payment on your consolidation loan. Remember, it’s like having one big puzzle piece instead of many small ones.

Is it Better to Consolidate or Settle Debt?

Debt consolidation and debt settlement are different things. Consolidation combines your debts into one loan, making it easier to manage. Debt settlement, on the other hand, means negotiating to pay less than you originally owed.

Consolidation is usually better if you can manage your payments and want to simplify things. Debt settlement is an option if you’re really struggling to pay your debts, but it can affect your credit score.

How Much Debt Should You Have to Consolidate?

There isn’t a one-size-fits-all answer to this. It depends on your situation. Debt consolidation is most helpful when you have multiple debts, like credit card bills, personal loans, and maybe a student loan. If keeping track of them feels like solving a never-ending puzzle, consolidation might be a good idea.

Although, it’s important to remember that debt consolidation isn’t a magic fix. It’s a tool to help you manage your debts more easily. If you’re unsure, it’s a good idea to consult with a trusted financial advisor or credit union to get advice tailored to your situation.

Here at Marine Credit Union, we do just that! We’ll match you with one of our caring and knowledgeable loan officers or financial counselors to better help you manage your debt or decide if debt consolidation is right for you.

You can also refer to MCU’s Debt Consolidation Calculator to understand your budgeting and financial responsibilities in various situations.

What’s the Disadvantage of a Debt Consolidation Loan?

As helpful as debt consolidation can be for one person, it can be harmful for another. One disadvantage is that the loan might have a longer repayment period, extending the life of your overall debt. While it’s more organized, it might take longer to repay the entire thing. Plus, if you’re not careful, you could end up with more debt if you start using credit cards again, and regain more interest.

How to Get Out of Debt

Getting out of debt isn’t always easy, but it’s definitely possible. Here are some steps:

Create a Budget

Make a plan for your money. Figure out how much you earn and spend. Try to spend less than you earn.

Cut Unnecessary Expenses

Look for things you can live without, like daily trips to the coffee shop or buying expensive clothes. These things add up more than you may realize and can save you BIG in the long run.

Pay More Than the Minimum

If you have credit card debt, paying just the minimum can take a long time to clear it. Try to pay more than the minimum amount due.

Build an Emergency Fund

Save some money for unexpected expenses so you don’t have to rely on credit cards when things go wrong.

Debt Counseling

If you’re feeling overwhelmed by debt, you can seek help from a debt counselor. They are experts who can provide advice on managing your debt and creating a plan to pay it off.

Get debt management and consolidation help with Marine Credit Union

Marine Credit Union can help you manage and/or consolidate your debt. By following some simple, practical steps, you have the power to take your debt from overwhelming to manageable. Let us help you get your finances back on track.

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