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Debt Consolidation vs. Debt Settlement – What’s the Difference

Debt Consolidation vs. Debt Settlement – What’s the Difference


As Americans, many of us have gotten into trouble by overspending money that we have not yet made.  The amount of personal debt we have is staggering.

Credit cards became mainstream in the early 1960s.  The generation that this was exposed to this was not familiar with how to use them because their forefathers and foremothers paid for everything with cash.  The only times they would get loans were for major purchases, like for a home.

People in the 1970’s and later had to learn how to use credit cards wisely.

One of the problems was a lack of responsibility on how to use these new devices since there was no training on how to use them correctly.  Then add in a high-interest rate a debtor can very easily become so far behind that they are hinging on bankruptcy.

Should I Do Any of These?

Before ever considering any of these options below you must understand that this is a major financial life decision and it should never be considered lightly.

These below techniques are for information purposes and I strongly suggest you do your own research before going down any of these paths.


Declaring bankruptcy is one option and is not the topic of this article.  We are going to cover less evasive techniques a person can use.  All of these are going to be individually based and this article is just an introduction into those possibilities.


Debt Consolidation

As the name implies this is a technique when you combine your debt into one large debt with one bill and one payment per month.  This is mainly with regard to credit cards and would not include car loans, student loans, home loans, or any other financed high ticket items.  Read about the difference between revolving debt vs installment loans.

There are many debt consolidation companies out there and you must do you own research before using one of them.  Make sure you vet them to ensure they are legit.  You can check their BBB (Better Business Bureau) rating and Yelp for testimonials/reviews.

Debt consolidation typically means you will be borrowing money to cover the cost of all of your credit card debt. If you get approved for the large loan then you pay off of those loans for one loan with a, hopefully, lower interest rate.

What About My Credit?

Since you are making a lower payment your credit may not be too affected.  You do have to stick with the plan that you have arranged, though.

Depending on the amount of debt you owe and the new interest rate you will be paying means it may take some time to pay everything off.

Your credit will be negatively affected, at first.  This will be due to the credit inquiry for getting the loan and in the first few months, this new loan will not have any history.  However, over time, your scores should start to go up as you make your on-time payments to this loan.

Credit Karma blogger, Eric Rosenberg, says this about credit consolidation and what to expect.

What are the Negatives?

The main one is your financial ability to pay off the new consolidated debt and this assumes you even qualify.

Also, is the amount of time that it may take to bring that payment down to zero.

The number one complaint to the FTC (Federal Trade Commission) is with credit consolidation companies.

Plus, there will be a fee that these companies will charge and that is added to your overall debt thus making you pay more money and for a longer period of time.  Ask Dave Ramsey as to what he says.

Let’s Do the Math

Let say you owe on three credit cards.  You have a combined balance of $20,000 at a 24% interest rate (this is not too uncommon).

Using the Simple Interest Formula you were taught in your high school or college math class is used here.  It is I=prt.  Or, Interest payment = principle * interest rate * time.  Time is always 1/12 as there is one payment per month in a 12-month year.

Thus, your interest payment is $20,000 * 0.24 / 12 = $400 in interest payment that month.

If your minimum payment is 3% of your balance.  This is $20,000 + $400 = $20,4000 * 3% = $612.

By paying the $612 will reduce your balance from $20,400 to a new balance of $19,788.  A total amount of $212.  According to the Bankrate Credit Card Payoff Calculator, this will take 54 months to pay in full assuming you never used the card, ever.

And this is you doing it all on your own.

Debt Settlement

Another option is to go through debt settlement.

In this option, you settle on your debt for less than what you owe.  Much like settling before going to court you are betting that the companies will take less than what you owe.

How Does That Work?

This is the one that can seriously hurt your credit for some time.  Almost the only way to settle for less than what you owe is to go into default.  That’s right!  You stop making payments.

If you are going to use this technique you should also hire a company that will assist you in the process.  These will be skilled negotiators who have experience in doing these types of negotiations.

When you fall behind on your credit card payments you will get major hits to your credit report.  They will eventually give you 30-day lates, then 60-day lates, then 90-day lates, and eventually 120-day lates.

Much like going through foreclosure on a personal residence these will continue to occur until a settlement is established and a payment arrangement is set.  Often it can be from 40% to 75% of the actual initial balance.

In this technique, you will be paying a lot less and over a shorter period of time but your credit will take a major hit for some time.

Are There Any Other Negatives?

Absolutely!  When you fall behind you will begin to get courtesy reminders by email and phone.  Possibly even by text message if you have SMS set up with the creditor.  These reminders will continue for several months and may occur multiple times per day.

The debt settlement company will suggest you change your email and phone number with the creditor to their system before you miss the first payment.  This does not always mean they won’t try to contact the “previous” number and email that the creditor had.

If you have a strong constitution and can handle the constant reminders that you are not making payments then this is an option you may want to consider.


The main benefit is that you are settling on less than what you owe on the principal balance.  There is also no interest rate involved.  There will be a fee that the debt settlement company will charge, though.  This amount will be based on what the can settle.

You will begin a payment plan with them like the one you would have with debt consolidation.  This can cover several years depending on the amount you owe and can settle for.

One other note is that your accounts will all be canceled.  You may not be able to receive another credit card until after there is an agreement with all of the creditors.


Before opting in to any of the above scenarios you must look at what you owe and what is the best option for you in the short-term and long-term scenarios.

Debt consolidation and debt settlement are two drastic solutions.  However, if you are on that merry-go-round of never getting ahead then you do have options available to you.  Choose wisely.


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Kevin A Dunlap

Kevin Dunlap is an author, podcaster, speaker and a licensed Nevada REALTOR® since September 2012. He has been involved in real estate since buying his first investment property in February 2002. He has also owned two small apartment complexes. He has specialties in creative real estate deals such as lease options and seller financing, as well as the normal purchase or sale of homes, condos, and townhouses. Kevin also has a team to help people who are employed in the Cannabis industry to buy homes, too.

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