Debt consolidation is one of many approaches to helping to manage overwhelming debt. When used properly, it can not only help you cope with high debt, it can even be the first step in financial recovery and a debt-free lifestyle. There's one other thing you might not know about debt consolidation. It can actually help your credit score.

Debt consolidation is not the same thing as debt settlement, debt management, or bankruptcy. Debt consolidation actually sounds counter-intuitive. To consolidate your debts, you roll all of your debts together and then take out a giant loan to pay off the individual debts. In a sense, you exchange many smaller debts for one colossal debt.

So how does that help? The idea is that if you have a lot of high-interest debts, you can re-organize and re-package them together into one large loan at a lower interest rate. For instance, if you take a bunch of credit card debts at rates of 16% to 20% and beyond and consolidate them in a loan for 10%, that translates into paying less every month.

Even better (for debt-free thinking) you can pay the same amount you were already used to paying but because interest rates are lower, you're knocking out more of the principal with each payment. Bottom line: your debt gets paid faster.

If you own a home, you can refinance your home and possibly re-package those debts at a very favorable, mortgage-type single-digit interest rate.

Debt consolidation is not for everyone. Not everyone can qualify; if your credit has already had a black eye or two, it may not be possible for you to take out a new loan, particularly such a substantial one. Debt consolidation is easier if you own a house, but that's not required. Debt consolidation will not be available to everyone who wants it.

But if you can consolidate your debt and you're considering that versus other financial options, you need to know that most debt settlement plans and certainly bankruptcy will leave a bad mark on your credit report.

Debt consolidation can help it.

Here's how. Your credit score is a moving target, a constantly changing number, which is calculated by three large organizations in the U.S: Experian, EquiFax, and TransUnion. All of these companies have a formula for your credit score and each formula is a little bit different. However, they all arrive at a number (your score) based on a variety of factors.

One factor is how well you pay off the debt you have. About a third of your total credit score comes from this factor, so it's very important. It looks at whether you pay your debt on time or late and if you make payments or flake out.

If you consolidate your debt you take out one new loan and then pay off a bunch of smaller loans. This hits your credit score favorably: you have paid off some loans….probably earlier than required. That's a good thing.

Consolidated debt simplifies paperwork and will eventually save you time. Instead of having to receive and write checks for a dozen or more bills a month, you have fewer debts (although it's much bigger). This reduces the likelihood of late payments or missed bills. That also can help your credit score.

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