The biggest differences between debt relief and debt consolidation are the number of options available for resolving debt and the credit-score impact. Debt relief is a term used to describe a variety of solutions available for debt resolution, including debt consolidation. Debt consolidation is a specific method of debt relief that involves merging multiple debts into one large balance with a single monthly payment.
Debt consolidation is a very popular method of debt relief, but it’s important to understand how it stands out from other debt solutions. In most cases, debt consolidation is preferable when you want to reduce your credit card utilization and protect your credit score in the short term. In all other cases, the other debt relief solutions should be considered.
Debt Consolidation: Best for Protecting Credit Before It Drops
Debt consolidation works in one of two ways. If you want to use a credit card, you can apply for a 0% interest balance-transfer card. You can then pay off your consolidated loan balance without worrying about interest charges. Alternatively, you can take out a low-interest loan and use the funds to pay off your existing debts. This method gives you the simplicity of a single monthly payment after consolidation and also allows you to reduce the amount of interest charged while you pay off your debt.
You can consolidate any type of debt, but you must do it while your debt is in good standing. If your account becomes delinquent, you will be unable to transfer your balances to another credit card or get a favorable APR on a new loan.
Debt consolidation has a few significant advantages over other debt relief solutions:
- Lower interest rate (compared to debt before consolidation)
- Lower credit utilization. When you transfer your balances to a balance-transfer card or pay them off with a loan, you increase your available credit on the original credit card accounts, which boosts your credit score.
- Minimal credit impact. During the consolidation process, your credit score may temporarily drop a few points when you apply for and open a new credit card or loan account. Unlike other debt relief options, debt consolidation does not cause your credit score to suffer from the reflection of negative items on your credit report (such as late payments, settled debt, and bankruptcy).
You can learn more about the process by reading our debt consolidation guide.
Debt Relief: Best for Delinquent Debt, Reduced Balances, and Fast Resolution
Debt relief can be accomplished through several methods, including debt settlement, debt management, debt consolidation, and bankruptcy. Debt settlement involves negotiating a lower repayment amount on a form of unsecured debt, such as credit card debt. Debt management is the process of restructuring debt under a more favorable payment plan with lowered interest. Finally, bankruptcy is a process where a judge decides the outcome of debt based on the debt holder’s financial situation.
These three debt relief solutions offer a few advantages over debt consolidation:
- Can be used for any status of debt (in good standing, delinquent, or default)
- Reduced repayment amount (in the case of debt settlement)
- Fast resolution (in the case of Chapter 7 Bankruptcy)
You can learn more about the different alternatives for debt resolution in our debt solutions guide.
The ideal debt relief solution will vary based on your priorities and the nature of your debt. For example, if debt forgiveness is most important, debt settlement and bankruptcy will be your only options. On the other hand, if you want your credit score to suffer minimal impact, debt consolidation will probably be your best bet. Carefully review your finances: understand what you can afford and what risks you are willing to take. Once you’ve made a decision, read the fine print on any agreements and factor in any fees associated with your selected option.
This answer was first published on 05/12/20. For the most current information about a financial product, you should always check and confirm accuracy with the offering financial institution. Editorial and user-generated content is not provided, reviewed or endorsed by any company.
