Debt Consolidation vs. Debt Settlement: Which Is Better?

Debt consolidation and debt settlement both have pros and cons. Which is best for you depends on your circumstances.
Sean Pyles
By Sean Pyles 
Edited by Kathy Hinson

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You’re trying to pay down debt. Should you use debt consolidation or debt settlement?

They sound similar, but they mean two very different things — and one can create more trouble for you.

Debt consolidation

In debt consolidation, several consumer debts are rolled into a single new one. You can use a balance-transfer credit card, debt consolidation loan, home-equity loan or 401(k) loan.

Why you might choose it:

  • To get a lower interest rate than you’re paying now, which saves you money and can help you pay off your debt sooner

  • To cut the number of payments you’re juggling

  • When the debt you're trying to pay down is a manageable amount and type

» How to pay off your debt: A three-step strategy

Debt settlement

Debt settlement is risky because you withhold payments from a creditor and then, once your account is severely delinquent, try to negotiate a smaller payment to satisfy the debt.

But withholding payment trashes your credit scores and opens you to being sued for payment — and there’s no guarantee that the creditor will agree to settle.

You can try debt settlement on your own or hire a company, but beware: This field is rife with shady players. The Federal Trade Commission recently ordered 11 such companies to halt their marketing, saying they took tens of millions of dollars from consumers and gave them little benefit.

Why you might choose it:

  • Try this only if you have an account that’s already long delinquent or in collections, and you think the creditor might accept a partial payment. You have little to lose because the damage to your credit score is already done.