Debt consolidation works by combining all of your debts into one place, usually in the form of a loan. This can be advantageous because you will be paying a new lower fixed-interest rate. With debt consolidation, you will have to pay less money in interest than you used to every month and all to one source. With some debt consolidation plans, you can even get tax deductions on the interest you pay. There are some disadvantages however, as debt consolidation can hurt your credit rating.