What is the difference between debt consolidation and settlement?

Debt settlement and debt consolidation are the two most sought after debt relief options. You can opt for any of the two if you have started to face problems with the dues that you owe to your creditors. Both the processes make your monthly debt payments easier but the two debt relief processes work in a different way.

Difference between two options

The main difference between debt consolidation and debt settlement is the way in which these two lower your monthly payments on your credit accounts. Settlement lowers the outstanding debt amount while consolidation works the other way round. It lowers the interest rate on your

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debt and also reduces the number of debts that you have as a single large debt.

The only similarity between these two debt relief options is that these can help you in handling only your unsecured debts and not the secured ones.

Again, settlement is mainly for those people who have very large debts. in contrast to this, consolidation is mainly for those people who have several unsecured debts with high interest rates on those.

Another difference between the two options is that settlement hurts your credit while consolidation helps in improving your credit. In case of settlement, you are required to miss payments before the creditors agree to your settlement request. Now, as you miss payments, it gets listed on your credit report and lowers your credit score. Your payment history accounts for 35% of your credit score and so it is quite obvious that if you miss payments, your credit score will lower. Based on this concept itself, debt consolidation helps in improving your credit. First of all, in order to consolidate your debts, you are not required to miss any payments on any of your credit accounts. After you consolidate your debts and as you start making the payments on your consolidated debt, it actually helps in improving your credit score. So, many financial experts prefer consolidation to settlement.

However, another very important thing that is to be remembered while consolidating debts is that you should never close down all the credit accounts at the same time after the consolidation. If all the credit accounts are closed at the same time, the total credit limit lowers and the credit usage increases in comparison to that. So, it is better to avoid closing down all of the accounts at the same time.

As for the debt relief option that you can opt for will depend on the financial situation you are in and also the debts that you owe to the creditors. If you have very high debt amount and if you don’t have much money, it is better to opt for settlement even if it hurts your credit. But, if you have high interest rated debts, you can opt for debt consolidation.

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