I'm adding an answer from late 2024 for VSCode. I realise the question was about old Visual Studio, but when googling the same for vscode it is this page that is the most popular result.

In VSCode the approach is different. You have to install one of the plugins for this reason. No native ways to use another compare/merge tool definitely, as I have found in many sources. I tried a couple of plugins and Meld Diff was exactly what I needed. It works extremely well for me!

The setup for Meld Diff is very simple:

1. Install the plugin
2. Go to settings, type "meld-diff.diffCommand" in search field and insert path to your comparison tool into the result setting. (The screenshot shows the same setting among the others, so that you clearly see the arguments are automatically configured correctly in the other fields.)

The path for MacOS should be /Applications/Araxis Merge.app/Contents/Utilities/compare. For Windows the path should be to the Araxis' ConsoleCompare.exe file (have seen this in their docs) but didn't check it myself.

And that's it! You can now go and use it right away.

You can right-click a file in the Source Control panel and use the respective command "Open with meld diff..." and so on. Or you can select a couple of files in VSCode's Explorer panel and run similar command (mentioning "meld") to compare them. Same for folders.

NOTE: Merge functionality didn't work for me (when selecting 3 files), but I don't need it too much so didn't dig into that matter. If anyone wants to invest into investigating further - please share the feedback here, too!