Debt consolidation and debt settlement are two completely different strategies used by individuals to reduce current debt payments, and they can be used separately or together.   Debt consolidation is combining multiple loans into just a single loan from one lender, typically at a lower rate.  Debt settlement is working with current lenders to negotiate payment amounts less than what you currently owe.  This is only advisable as a last resort, as it is typically only effective if you have fallen behind in your current payments.

Debt Consolidation

To consolidate means to combine several things into one.  Debt consolidation is combining multiple loans into one.  For example, someone with student loans, credit card debt, and a personal loan could combine all of this debt into one payment from one lender.  We advise only doing this if money is saved, and while debt consolidation often saves money, it’s not a sure thing.  If the total monthly payments before consolidation were more than the new single payment, than yes, the average interest rate is lower and money is being saved.  But if the new single payment is higher than all the combined old payments, than the interest rate actually increased and you are spending more each month. It’s easy to tell, as long as you know what you are paying today.

Debt consolidation can be a very effective strategy in minimizing interest payments and saving money.  This is particularly true if the debt currently being paid is high – say, above 15-20%, such as with credit card debt.  There are two options two consolidate debt:

1. Balance transfer credit cards – this option requires a minimum 680 credit score
2. Personal loans at a lower rate – this option requires a minimum 58 credit score

To see which lenders you qualify free, check out the BrightRates personal loan comparison.

Debt Settlement

Debt settlement also seeks to minimize your monthly debt payments, but it is not nearly as reliable as debt consolidation.  Debt settlement means contacting the lenders to whom you owe money, offering to pay a portion but not the entire amount of what you owe, and hopefully settling on that future payment plan.  Can you do this yourself?  Definitely.  But it takes someone who is very internet savvy and organized, and consequently, most people rely on a debt settlement company.  Most debt settlement companies charge some sort of monthly fees, typically around $100, and they make no guarantee that debts will be reduced.  So before you decide if this money would be better used actually paying off your debts, check out our rankings of Debt Settlement companies.

There is one BIG catch with debt settlement.  It’s typically much more effective if you are already behind on your payments.  If you are already behind on payments, it’s worth considering.  But stopping payments if you might be able to continue is dangerous.  Even if you or the company representing you is successful in negotiating the amount down, you will still damage your credit score.  You’re essentially playing a game of chicken with the lenders, and even if you win, your credit score will likely have more negative accounts which will weigh down your score for up to 7 years.