Debt Consolidation vs. Debt Management

Home » Credit Card Debt Relief » Debt Consolidation » Debt Consolidation vs. Debt Management

American consumers have rebuilt the nation’s credit card debt to record levels and in the process rekindled the debate about whether debt management or a debt consolidation loan is the better solution for dealing with that problem.

Add the fact that households carrying a balance from month-to-month typically pay 20-36% interest rates on credit cards and owe an average of $8,509 and it’s not hard to figure why millions of American consumers are a missed payment or two away from a financial crisis.

If you have to pay 25% interest on a credit card balance of $8,509, your interest payment alone for one month would be $177!

The COVID-19 pandemic kept many consumers at home the first half of 2020 so total credit card debt actually dropped below $1 trillion for the first time since May of 2011. According to the Federal Reserve Bank of New York, credit card debt nationwide stood at $890 billion at the end of Q1 in 2020.

Where do you turn for help when your credit card debt – or any other form of unsecured debt – gets that far out of hand?

The best option is debt management through a nonprofit credit counseling agency, but that is hardly the only choice. Debt consolidation loans, debt settlement and even bankruptcy, if the financial problem has gotten completely out of control, are other options.

Choosing a Debt Relief Option

There are several options for credit card debt relief, but the choice often comes down to debt management vs debt consolidation. Both are practical and proven ways to get out from under the burden of too much debt, though they rely on very different methods. The one similarity between the two programs is that each requires the consumer to make a monthly payment, but that is where the similarities end.

Debt Management Plan

A debt management program (DMP) is a plan to eliminate debt with the help of a credit counseling agency. You make a monthly payment to the credit counseling agency, who uses the money to make payments to each of your creditors in an agreed upon schedule.


  • Credit card companies offer credit counseling agencies lower interest rates and relax fees to help consumers reach an affordable monthly payment.
  • Agencies work with the consumer to develop a budget that includes an affordable monthly payment based on your current income
  • A DMP is not a loan. The consumer is able to consolidate debts without opening another line of credit
  • Credit score isn’t a qualifying factor
  • Credit counselors are required to provide tools and financial education for the consumer to prevent future financial troubles
  • You can cancel your commitment at anytime


  • If you miss a payment, the agreement the credit counseling agency made with your creditors to reduce interest rates and eliminate fees, could be voided
  • You are required to close all of your credit card accounts and use that in emergency purposes only

Interest Rates:

Credit scores are not a factor in Debt management programs. In fact, the average credit score for DMP clients is around 555. Instead, credit counseling agencies work with creditors to set interest rates based on the consumer’s ability to pay. The range could be as low as zero-to-6% for hardship cases (credit scores 550 or below) to an average of 8% for most clients of a debt management program.


DMP’s have a $75 set up fee and monthly fees of $30-$55, based on a percentage of your payment. Learn more about debt management program fees.

Effects on Credit:

The debt management program asks you to stop using all but one credit card. Reducing your available credit (by closing the cards on the program) can negatively impact your score. However, if you stop using the cards and start paying down the balance, your score eventually improves.

Debt Consolidation Loan

Debt consolidation involves taking out one large loan and using the money to pay off several unsecured loans, like those that result from using multiple credit cards. The lender is typically a bank, credit union or online loan company and the expected payoff time is 2-5 years.


  • You’ll have the necessary funds to pay off all your creditors
  • The interest rate on the consolidation loan should be lower than your current rates on credit cards
  • It consolidates your debt into one payment, although, if the credit lines remain open and active, the problems may continue
  • You still have use of your credit cards while repaying the loan


  • There are borrowing fees associated with loans that will increase the amount of your debt
  • Depending on your credit score, you may be offered a loan with a high interest rate or you may not even qualify for a loan
  • You have to pay creditors and manage your debt on your own
  • Failure to make on-time payments will result in late fees and possibly default
  • There is no education requirement on the part of the lender.

Interest Rates:

Banks, credit unions and online lenders rely heavily on credit scores when making debt consolidation loans. Any score above 650 could get you a $15,000 loan for 8%, maybe better. The same loan with a score under 650 and the rate jumps into double digits, if you are able to get one at all. Credit scores below 580, for example, are seldom even considered for a loan.


Debt consolidation loans have fees that vary from lender to lender. Origination fees are the most consistent one charged by most lenders and that amounts to 1%-8% of the monthly payment. Other fees that may apply include late payment fees ($15-$30); insufficient funds fee ($15) and even check processing fees ($7).

Effects on Credit:

The debt consolidation loan means adding another line of credit, which has a negative impact. However, if you make on-time payments for at least six months, it eventually improves your payment history, credit utilization and credit mix, which will end up being a positive for your credit score.


  • Proof of income: Lenders want to make sure you are financially stable enough to take on the loan.
  • Credit history: Lenders will look at your payment history, and use your credit score to determine your interest rate.
  • Equity: For larger loans, lenders may want collateral like home equity to protect them from financial risk.

Debt Consolidation vs. Personal Loan

It’s easy to get confused when financial terminology is involved. A debt consolidation loan and a personal loan serve the same purpose. They each can be used to pay off unsecured debts. A debt consolidation loan is a type of personal loan where a lender provides a single loan that is used by the borrower to pay off numerous debts.

Process for Obtaining a Debt Consolidation Loan

Cleaning up your credit report is the first step any consumer should take before applying for a debt consolidation loan. A low credit score can lead to a denied consolidation loan.

Lenders look at your credit report and credit score for evidence you can or can’t repay the loan. The higher your credit score, the lower the interest rate the lender will charge for a debt consolidation loan.

You can obtain a free copy of your credit report at Look it over closely and make sure it accurately reflects your financial story.

Once you are satisfied with the information on your credit report, go to a bank, credit union or online debt consolidation lender and fill out an application for a debt consolidation loan. Be prepared with details about your income, employment, years on the job and any other relevant financial information that helps prove you can repay the loan.

The loan officer will use that information along with your credit score to determine if you qualify for a loan, what interest rate you must pay and any other conditions for your loan. It is best to apply to multiple lenders, so you have a chance to compare terms and conditions before making a final decision.

Difference between Debt Relief and Debt Consolidation

The terms “debt relief” and “debt consolidation” often are confused with each other because they belong to the same family of financial solutions, but there definitely are differences.

A debt consolidation program is geared toward paying the full balance on your debts. It usually involves a debt management program or debt consolidation loan, both of which combine multiple bills into one monthly payment with the goal of eliminating debt over a 3-5 year period.

Debt consolidation through a debt management company involves adding up all your debts into one place and then paying the debt management company who in turn will pay off the debt over a span of a couple years. A debt consolidation loan pays off all your outstanding debts. Then, you are left with paying only the loan you took out from a bank with the incentive that the loan has a lower interest rate than the debt you initially owed.

What it comes down to is debt consolidation is a form of debt relief like debt settlement and bankruptcy. It is not entirely the same as stated before, but another option for consumers on their journey to becoming debt free.

Debt relief is tilted more toward paying a portion of debt and having the rest forgiven.

In situations when you might have a lot of unsecured debt other than credit cards (such as medical debt and personal loans) debt settlement or bankruptcy is an alternative.

Debt settlement is offering the lender a percentage of the debt owed (usually between 50%-75%) and hoping they will forgive the remainder of the bill. Debt settlement is usually done through a debt settlement company, though you could attempt to do it yourself.

Debt settlement companies attempt to get your creditors to accept less than the full amount you owe by offering a lump sum of cash. The way it works is that you stop paying your creditors, and instead pay the debt settlement company each month. When the debt settlement company thinks that they have enough cash to negotiate, they go to each of your creditors and try to make a deal.

It doesn’t always work out, and of course there is a fee. The debt settlement company will either charge you a percentage of your total debt, or a percentage on the amount eliminated through settlement.

Bankruptcy is a nuclear option of debt relief. You declare yourself unable to pay your debts and ask a bankruptcy judge to give you relief from creditors. Bankruptcy will end up staying on your credit report for 7-10 years based on which type of bankruptcy you declare. This in turn will affect everything from getting a loan for a car to signing a mortgage.

Filing for chapter 7 bankruptcy sometimes is a better alternative to debt settlement. In chapter 7 bankruptcy, debts are discharged, while assets, that are not protected, are sold off. You should hire a bankruptcy attorney to handle the proceedings and weigh your options.

» Learn More: Debt Consolidation vs. Bankruptcy

Is Debt Management or Debt Consolidation Right for You?

If you are determined – and committed! – to eliminating credit card debt, either form of debt relief will work. Both require the discipline of making consistent monthly payments to succeed.

Because every person’s financial situation is unique, the real question to be answered is: Which form of debt consolidation works best for me?

To answer that, start with your credit score and see where that goes in determining the interest rate on a debt consolidation loan.

If your score is not 700 or higher, you most likely will be paying a double-digit interest rate. That rate may still be less than what you’re paying on your credit cards, but factor in the fees associated with the loan and you may be closer to a push than you realize.

Plus, there is no hiding from the lender. If you miss payments, they will come after you with liens, lawsuits and debt collection agencies until you pay them back.

Credit scores aren’t a factor in debt management programs. The agencies that offer nonprofit debt consolidation will look closely at your income and expenses to see if there is room for affordable monthly payments that eliminate debt in 3-5 years. They usually are able to pull the interest rate on your debt below 10%, sometimes even down as far as 5%-6%.

Plus, if you decide at anytime you want to quit the program, there is no penalty. It’s not wise to walk away, but you can leave without fear of liens, lawsuits or debt collectors.

Every great player has a coach that they can lean on. Contact a nonprofit credit counseling agency to walk you through the steps on how to find a debt relief program that fits best with your situation.

About The Author

George Morris

In his 40-plus-year newspaper career, George Morris has written about just about everything -- Super Bowls, evangelists, World War II veterans and ordinary people with extraordinary tales. His work has received multiple honors from the Society of Professional Journalists, the Louisiana-Mississippi Associated Press and the Louisiana Press Association. He avoids debt when he can and pays it off quickly when he can't, and he's only too happy to suggest how you might do the same.


  1. Frankel, R. (2020, July 17) Credit Card Debt Is Down During COVID-19. Here’s Why. Retrieved from
  2. Comoreanu, A. (2020, June 24) Credit Card Debt Study. Retrieved from
  3. N.A. (2018, January 16) Debt Consolidation vs. Debt Settlement vs. Debt Management Program. Retrieved from
  4. N.A. (2018, March) Getting out of Debt. Retrieved from
  5. Stolba, S. (2019, January 10) Can Debt Consolidation Affect Your Credit Score? Retrieved from
  6. N.A. (2019, July 1) Debt Consolidation Loans. Retrieved from
  7. N.A. (ND) What’s the difference between a credit counselor and a debt settlement company? Retrieved from