The fee you pay for a transaction is based on the number of inputs you spend. For example, let's say you're sending .1 BTC. That .1 BTC, however, is really the sum of a bunch of mining outputs. If you get .01 per block, that .1 BTC is 10 transactions of .01.

So your send of .1 is really spending those 10 unspent transactions. This can increase the transaction fee, because the weight of the transaction is bigger.

Consolidating means you spend all your multiple outputs by sending them to a single input when fees are low. That way instead of 10 inputs to your transaction, you just have 1.

Imagine you're at the store and want to pay for your groceries. The total is $20. You have a jar of quarters, or you have a $20 bill. Which is easier to use? Consolidation is taking your quarters (the rewards from all your mining) and merging them into a $20 bill.