U.S. household debt has reached a record high, climbing to $18.39 trillion at the end of the second quarter of 2025, according to the Federal Reserve Bank of New York. That’s a $185 billion increase from the previous quarter.
Credit card balances make up a growing share of that total, now standing at about $1.21 trillion—up $27 billion in just three months and $67 billion higher than the same time last year. This marks one of the largest annual increases in recent history.
The trend suggests that many households are still relying on credit to cover everyday expenses, especially with inflation and higher interest rates putting pressure on budgets. Without an emergency fund or other resources, it’s easy for balances to grow quickly, leading to costly interest charges and repayment challenges.
Debt consolidation is one option that may help make repayment more manageable. It involves combining several debts into a single monthly payment, often with a lower interest rate. While this can simplify finances, it’s not the right fit for everyone. Understanding both the benefits and potential risks can help you decide if it’s worth exploring.
How Debt Consolidation Works
Debt consolidation means replacing multiple debts with one new loan or repayment plan. The goal is usually to simplify payments, reduce interest, or both. Here are a few common approaches:
- Personal loan: This is an unsecured loan from a bank, credit union, or online lender, typically with a fixed interest rate and repayment term.
- Home equity loan or HELOC: HELOCs let homeowners borrow against their home’s equity, often at a lower rate. However, the home is used as collateral, so missing payments could put it at risk.
- Balance transfer credit card: This refers to moving existing credit card debt to a card with a low or 0% introductory APR. This can help save on interest if the balance is paid before the promo period ends.
- Debt management plan: Offered by nonprofit credit counseling agencies, these plans may consolidate payments and help negotiate lower interest rates with creditors.
Which option is available or suitable depends on factors like your credit history, income stability, total debt amount, and whether you own property.
Pros of Debt Consolidation
1. Simplifies Your Payments
Instead of juggling several due dates, you make just one monthly payment. This can make it easier to stay organized, avoid missed payments, and reduce the stress of managing multiple bills.
2. May Lower Your Interest Rate
If you qualify for a lower rate than what you’re currently paying on your credit cards, more of your payment will go toward reducing the principal balance. Over time, this can help you pay down debt faster and for less money.
3. Could Reduce Your Monthly Payment
Extending your repayment term or securing a lower interest rate may result in a smaller required payment each month. This can free up cash flow for essentials or for building an emergency fund, which may help you avoid turning to credit cards for unexpected expenses.
4. May Help You Get Current on Payments
If you’ve been falling behind, consolidation could give you a chance to catch up and make consistent payments again. That can relieve some financial pressure and help you regain a sense of control over your budget.
5. Can Help Limit Further Credit Damage
Missed or late payments can harm your credit score. Consolidating your debt and keeping up with the new single payment may help you prevent additional negative marks.
Cons of Debt Consolidation
1. Possible Fees and Closing Costs
Some consolidation options, especially those tied to home loans, may come with significant upfront costs. These can include application fees, closing costs, or balance transfer fees, which can add to your total debt.
2. Risk of Taking on More Debt
If spending habits don’t change, it’s easy to start using credit cards again after paying them off through consolidation. This can leave you with more debt than you started with.
3. Potentially Higher Total Interest
A lower interest rate can save money in the short term, but if the new loan has a much longer repayment term, you could end up paying more in interest over time.
4. Doesn’t Address Underlying Financial Habits
Consolidation can make debt more manageable, but it doesn’t fix overspending or other budget challenges. Without changes to how money is managed, debt may build up again.
5. Possible Risk to Collateral
If you use your home or another asset to secure a consolidation loan, missing payments could put that property at risk.
Is Debt Consolidation Right for You?
Debt consolidation can be a useful tool if you have steady income, manageable total debt, and the discipline to stick to a repayment plan. It may help simplify your finances and reduce interest costs, but it’s not a cure-all. The right choice depends on your overall financial situation, goals, and habits.
Before deciding, compare the terms of any consolidation option with what you’re currently paying. Consider whether you can make the required payments consistently and whether the new arrangement will save you money over time.
Alternatives—such as negotiating with creditors, working with a nonprofit credit counseling agency, or exploring a debt management plan—may also be worth reviewing.
If you’re unsure which path makes the most sense, you may want to speak with a trusted financial counselor or a reputable debt relief company to explore your options.
