In this explainer

Debt consolidation and debt settlement sound alike, but they do opposite things to your balance and your credit. Consolidation rolls your debts into one payment - it does not erase a dollar. Here is how it really works.

General information, not professional financial, tax, legal, or insurance advice. The Dreamy Leads Research Desk is an editorial and data team, not a licensed advisor.

Chapters

  1. 0:05 What debt consolidation is
  2. 0:27 The credit score you usually need
  3. 0:32 The balances it targets
  4. 0:36 Consolidation versus settlement
  5. 0:56 When it makes sense

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Full transcript

What debt consolidation is

Debt consolidation means combining several debts into a single new loan or balance, ideally at a lower interest rate, so you make one fixed payment instead of many. Unlike settlement, it does not reduce what you owe - it reorganizes it to be cheaper and simpler to manage. This is general information, not advice.

The credit score you usually need

Consolidation generally rewards decent credit, because you are qualifying for a new loan.

The balances it targets

Consolidation works best on high-rate unsecured debt, especially credit cards.

Consolidation versus settlement

Here is the key difference. Settlement reduces your balance but damages your credit and can trigger a tax bill on the forgiven amount. Consolidation keeps the full balance but, with a lower rate and one payment, can actually protect your credit if you keep up. They solve different problems.

When it makes sense

Against a household's total debt, consolidation fits someone with steady income and good-enough credit who is drowning in multiple high-rate payments. If the credit is not there, settlement or credit counseling may fit better. A licensed professional can help you choose. Run your own numbers in our explorer.

Frequently Asked Questions

What is the difference between debt consolidation and debt settlement?

Consolidation combines your debts into one new loan or payment, usually at a lower rate, without reducing the balance - and it can protect your credit if you keep up. Settlement negotiates creditors down to less than you owe, which reduces the balance but damages your credit and can create a taxable forgiven amount. They solve different problems. This is general information, not advice.

What credit score do you need to consolidate debt?

For a consolidation loan you generally need a credit score around 640 or higher to qualify for a rate low enough to make it worthwhile, though requirements vary by lender and product. If your score is lower, settlement or credit counseling may be more realistic paths. This is general information, not advice.

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