Debt Consolidation vs. Debt Settlement: Which Is Better?

Debt consolidation and debt settlement are two different ways to address debt. Which is best for you depends on your circumstances.
Sean Pyles
Jackie Veling
By Jackie Veling and  Sean Pyles 
Edited by Kim Lowe

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If you’re trying to tackle your debts, you might be wondering whether debt consolidation or debt settlement is the better option.

Though these two strategies sound similar, they’re very different, with debt settlement typically having more risks than debt consolidation. Here's what to know about how debt consolidation and debt settlement work and when each could make sense for you.

What is debt consolidation?

Debt consolidation is the process of rolling multiple unsecured debts into a new type of credit, like a balance transfer credit card or a debt consolidation loan. You’re left with one payment, which is easier to manage than juggling multiple bills. This new type of credit should charge less interest than your current debts, which saves money and helps you get out of debt faster.

Balance transfer cards are best for credit card debt, as long as you can qualify. You usually need a credit score of 690 or higher. By transferring credit card balances to a 0% balance transfer card, you can pay off debt for no interest during the promotional period — typically a year or more. After that, you’ll pay the regular annual percentage rate.

Debt consolidation loans can pay off a mix of unsecured debts, including credit cards, and are available at banks, credit unions and online lenders. You apply the money from the loan to your debts, then pay back the loan over two to seven years with fixed interest. Borrowers across the credit spectrum can apply for a consolidation loan.

When to consider debt consolidation

  • You have credit card debt or a mix of unsecured debts. Debt consolidation is a good fit for unsecured debts, especially credit cards, since they tend to have high interest rates. Secured debts like auto loans are tied to collateral, and rates tend to be lower, so you won’t save as much on interest. Some lenders may have restrictions about using a consolidation loan to pay off secured debts.

  • You can qualify for a low enough rate. Debt consolidation makes the most sense when you can qualify for a 0% balance transfer credit card or a consolidation loan with a lower annual percentage rate than your current debts. Borrowers with fair or bad credit (a score of 689 or lower) may have fewer options, but there are debt consolidation loans for bad credit

  • You can commit to a year or more of paying down debt. Whether you choose a balance transfer card or a debt consolidation loan, you’re looking at a year or more of making payments on your debt. With a loan, payments can stretch to five years or more. Missing payments can trigger late fees and hurt your credit. 

  • You’ve fixed any core spending issues. Debt consolidation doesn’t get rid of debt. It just makes it easier to pay off. If you’re still overcharging your credit cards, consolidation won’t help and can even make things worse. For example, if you move your credit card debts onto a balance transfer card, then start charging the newly freed-up cards, you’ll be deeper in debt than before.

What is debt settlement?

Debt settlement is when you settle a debt for less than what you owe, usually with the help of a for-profit debt settlement company.

A debt settlement company will advise you to stop making payments on your debts and funnel the money into an escrow account. As your debt grows more delinquent, the company negotiates with the creditor to accept a smaller amount. The hope is that the creditor figures a lesser payment is better than none. Most debt settlement companies charge a fee of 15% to 25% of the amount you owe for each successful settlement.

But debt settlement comes with big downsides: Your credit score may tank, and there’s no guarantee your creditor will accept the offer.

When to consider debt settlement

  • You have a mix of unsecured debt. Debt settlement companies can settle unsecured debts, like credit cards, medical bills or personal loans. Debt settlement doesn’t address secured debt, like an auto loan or mortgage. 

  • You’re certain you can’t repay what you owe. It’s better to explore other debt payoff options before hiring a for-profit settlement company. But if you’re sure you can never pay back your debt in full, settlement may offer relief. 

  • You’re willing to take the credit hit. Missing payments on your debts and settling a debt both hurt your credit score. Still, paying something is better than paying nothing at all, so settlement may be worth the ding to your credit if there’s no alternative.

  • You can stomach uncertainty. It may take a few years to successfully settle your debts, and even then, there’s no guarantee your creditors will accept a debt settlement offer. Some creditors may refuse to work with a debt settlement company.

Debt consolidation vs. debt settlement

Debt consolidation

Debt settlement

Best for

Unsecured debt, including credit card debt.

Unsecured debt, including credit card debt.

Credit score impact

Applying for a debt consolidation product requires a hard credit pull, which temporarily lowers your score a few points.

Missing payments and settling debts can hurt your credit score.


You may pay interest and some fees.

Settlement fee ranging from 15% to 25% of the amount owed. Other fees may apply.


One to seven years, depending on the debt consolidation product you choose.

Varies, but can take up to four years.

Other risks

Consolidation doesn’t get rid of debt, but makes it easier to pay down. It doesn’t solve core spending issues.

Not all creditors work with debt settlement companies or accept debt settlement offers.

Other ways to get debt relief

Debt consolidation and debt settlement aren’t the only ways to get out of debt. Consider all your options before making a decision.

DIY debt payoff

Depending on the amount of debt, you may be able to address it on your own. There are two main strategies for paying down debt: the avalanche method and the snowball method.

With the avalanche method, you pay down the debt with the highest interest rate first, then work your way down, applying savings in interest to each consecutive debt. With the snowball method, you pay down the smallest debt first, then work your way up, building momentum as you go.

However, if your debts will take more than five years to repay, it’s best to consider other options.

Debt management plans

Nonprofit credit counseling agencies offer debt management plans, which work similarly to debt consolidation by rolling multiple unsecured debts into one with a single monthly payment at a lower interest rate. They typically last three to five years and may come with an initial setup fee and monthly fees, ranging from $20 to $75.

You won’t be able to use your credit cards or open new lines of credit while on a debt management plan.


If your debt exceeds 40% of your income and you can’t pay it off within five years, bankruptcy may be an option. Bankruptcy can wipe out unsecured debts or help you enter a repayment plan with better terms. It can also stop debt collection calls, debt lawsuits and wage garnishment. The process is complicated though, so you’ll want to consult a bankruptcy attorney.

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