7 Reasons to Avoid the Debt Options of Consolidation or Settlement (2024)

“Save money, reduce your debt, all with one easy payment.” We've all gotten those letters. SO MANY LETTERS. And they are very appealing! Who wouldn't want to ease all of their financial difficulties in one fell swoop (or “swell foop,” as my dad used to say)? The purveyors of debt options such as consolidation and settlement definitely know how to work their intended audience.

In case you are not familiar with the terms, debt consolidation is when you get a loan to pay off all of your debts and then are only paying to one lender instead of several. Debt settlement is when you contract with an agent to negotiate with all your creditors to reduce the balance of your debt. That agent then handles all of your payments for you.

They both promise wonderful things. And I've read the letters, and I've even picked up the phone and almost made a call, because it sounded like something I really should try. But the hard truth is that there are significant problems with these debt options, and so The Man and I have decided we will never use them. Let me tell you why.

Problems with the Debt Options of Consolidation and Settlement

1) The monthly payment may be less, but the overall time is usually longer. Just do a quick check of what they're offering. You'll be saving money each month in the short term, but over time you'll still be paying interest long after you would have had the whole thing paid off if you had just stuck with taking care of it yourself.

And for me personally, I actually want that larger payment now. I want it to HURT and hurt BAD, so I won't be foolish enough to keep doing this stupid thing called credit card debt.

2) The interest rate isn't really that good, especially over the long haul. I can do better playing balance transfer roulette. That's when I get one card down low enough that I can transfer part of another card's balance onto it and get a deal of an interest rate for awhile. When the promotional interest rate expires, then I transfer that balance onto a different card — lather, rinse, repeat. It's not ideal, but it can help keep interest from accruing so fast, which means that more of your payment is going to pay down the balance.

I can REALLY do better than their supposedly great rate by busting my buns to get it all paid off as quickly as possible. Just sayin'.

3) These debt options don't solve the root problem, only the surface difficulty. Too often when things are made easier, we jump right back into using the credit cards and end up worse than before, because now we have this “one easy payment” AND all the credit cards are maxed out again. This happens a whopping 78% of the time, actually.¹ That's because the spending habits that caused the problem in the first place have not been dealt with.

4) Despite claims to the contrary from the debt help companies, debt consolidation does not look good on a credit report. Your creditors will show that your payments are being made by a third party, which is a red flag to anyone looking at your credit report.² If you have been missing payments already, then obviously making regular ones through debt consolidation will help your credit score in the short term. But once that initial adjustment is over, you'll still be considered a poor risk because you were unable to handle things on your own.

5) In the case of debt settlement, it's an integrity issue for us. That “negotiated” lower balance means we are not paying everything we owe. This, to us, is failing to fulfill our side of a contract.

When we put those charges on the credit card, we made an agreement with the credit card company that we would pay them back. Negotiating a lower balance means we are NOT doing what we agreed to do. That does not sit well with us; we can't in good conscience go back on that commitment.

Sure, the credit card companies have made interest off of us, but that was also part of the agreement. WE AGREED TO PAY INTEREST. It's not their fault we are having trouble paying; it is completely ours for being stupid idiots and racking the balances up so high. Why should they have to pay for our foolishness?

6) As the bookkeeper in the family, I don't want anyone else in control of my payments. I would like to decide how much I pay each month, and where it goes to, and when to send it. This is part of being an adult, to my mind. You get yourself in a mess, then you get yourself out. You made your bed, now lie in it. No excuses, no trick plays, just get ‘er done.

7) We refuse to support the system. We want to starve the beast. Buying into (pun intended) the whole debt consolidation or debt settlement model is to let those jerks continue to get away with their dastardly plan to keep us all in hock for the rest of our lives, for THEIR profit, not ours — although they would have you think they're just trying to be helpful. NOPE. NOT GONNA DO IT. NOT ANY MORE.

Now, I'll be freakishly honest with you and say that things are getting a little scary, with my husband having taken a job that pays much lower than we're used to, just to have some money coming in. (See 10 Things to Do After a Job Loss for more details about, well, his job loss.) His current salary is an amount that leaves NOTHING left for extras — and by extras I mean eyeglasses, shoes, school supplies… so yea. We'll be doing good to get the minimum payments sent to those stupid credit card companies.

BUT I AM HAPPY TO BE IN THIS SPOT, crazily enough. Now all those things I've been hearing about — being ready for an emergency, not spreading yourself too thin with credit, being disciplined with spending, etc. — are actually being manifested in my life. It's not just theory any more. Can we say “what better way to get motivated?” This is where the rubber meets the road, and I am bound and determined NOT TO USE CREDIT ANY MORE. Even though it's tougher now than it's ever been.

If you have already bowed to the pressure and done one of the debt options of consolidation or settlement, you can try to beat them at their own game. Don't take the easy route. Pay as much extra as they will let you. Don't let that debt consolidation loan go the full term — pay it off as early as possible. Make it your first priority. Pretend your salary is no more than will provide the absolute necessities and put all the rest towards that loan. And DON'T use those credit cards any more!!!