Debt Settlement vs Debt Consolidation

Debt Settlement vs Debt Consolidation

Debt settlement and debt consolidation are two terms heard often and mistakenly interchanged for each other. However, consolidation and settlement are two different things entirely.

Debt consolidation takes the total amount of debt a consumer has with credit cards, store accounts, and home equity loans and consolidates them into one single amount which payments can be made against.

There are two options which can be taken at this point; either the consumer makes the single payment towards the consolidated amount or takes out another loan to pay off all the consolidated accounts and pays back the single loan over time.

The problem with debt consolidation is that often, the consumer can make cutbacks in their spending and tackle one debt at a time until it is paid off and then repeat again for the next account. Debt consolidation often has fees and interest applied which may be higher than a payment plan with an individual account.

Debt settlement has the consumer, or a debt settlement company, making an offer of less than the total amount owed in order to close out the account. Often, the consumer can save 25, 50 or even 75% of the total principal owed.

The problem with debt settlement is it can hurt the credit score of the consumer as they are not paying back the full amount they owe. Also, credit card companies will often only give settlements for accounts that are severely in arrear and in danger of charge off.

Consumers should know the difference between debt settlement and debt consolidation when they are choosing the correct debt solution path.