The term “consolidation” is used to describe two very different credit-related services.
The first type of consolidation is a debt consolidation loan. Essentially, you go to a lender and they make one loan that pays all of your other debts in full. Those debts are then shown as “Paid in Full” on your credit report with a zero balance.
This type of loan consolidation will typically reduce interest-rates but have longer repayment terms, which means your payments usually are lower. However, the longer repayment period may cost more in interest.
The benefit is that over time, as you make your payments on time, you will maintain a positive credit history and continue to help your credit scores.
Consolidation through debt settlement
The second service that is often described as debt consolidation is actually debt settlement.
In this form of “consolidation” you make one payment to a debt settlement firm that then distributes the amount among your creditors. You actually consolidate your payments into one check. You don’t actually consolidate your debts.
The debt settlement firm negotiates settlement with your creditors for each of your debts. As a result, the accounts will be shown as “settled” in your credit report, which hurts your credit history and your credit scores.
Before agreeing to a “debt consolidation plan” be sure you understand what is actually being described and what the impact will be on your credit.
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Scoped on: 08/02/2016