Description: Know the difference between debt consolidation and debt settlement to make a better decision.

Debt consolidation and debt settlement: How are they different?

Debt settlement and debt consolidation are not the same. Though both of them help you get rid of your debt burden, they have different impacts on your credit score and finances. Prior to signing an agreement with a debt consolidation or a debt settlement company, you must know the pros and cons of their services. Obviously, you must shop smartly before signing on the dotted line.    

Debt settlement – direct elimination of your debts

Once you decide to go for the services of a debt settlement company, they would carry out negotiations with your creditors to eliminate a portion of your debt instantly. They agree to settle your debts since they apprehend that you might file bankruptcy and in that case they wouldn’t receive a single penny. Thus, the creditors are willing to cut down your outstanding balances. Through a reduced payment, you can become debt free quite soon.      

However, debt settlement spoils your credit for one or two years. Creditors report your debts to the credit bureaus as “settled” instead of “paid in full”. This has a negative impact on your credit history since you’re making a partial payment of your balances due. You might face difficulties to get fresh credit in the near future. Even if you get it, you would be asked to pay a very high interest rate.

Debt consolidation – a time-consuming approach to debt

Debt consolidation combines all your debts into one so that you can manage them efficiently. Consolidation companies negotiate with your creditors for reducing your interest rates and monthly payments. You just send one payment to the consolidation company that in turn pays off all your bills. Reduced interest rates help you pay off your bills promptly.

While consolidating your debts, your creditors stop you from acquiring new loans. They would wish to see that you make timely payments and start lowering your debt. Your credit score might go down slightly as lenders inform you’re working with a consolidation company. However, following the completion of your consolidation program, you can qualify for fresh credit at prime rates. Debt consolidation is typically a lengthier process than settlement.    

Explore your options prior to signing any contract

Prior to signing a contract with a debt settlement or a consolidation company, it is advisable that you explore different companies. It is essential before deciding on one. Ask questions regarding their procedure and fees. Comparison shopping helps you understand whether the fees are affordable. You can get plenty of information about the settlement program at the time of requesting a quote.  


The faster you get out of debt, the sooner you’d better your credit and financial condition. Debt management companies can help you start off. However, select carefully and go for the solution that’s right for you.