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Will settling a credit card debt hurt your credit?

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Will settling a credit card debt hurt your credit?
The first step that most U.S. banks require to begin the settlement negotiation process is that the customer must be delinquent in his or her monthly payments. So, initially, yes is the answer, as missing monthly payments will reduce your credit score. The longer the payments are missed, the more the score will drop.
However, once you reach a negotiated settlement, the bank will report to the credit bureaus that the account is "paid, settled for less than amount owed." While this doesn't rate your score as high as an "account paid in full" note, you will actually see a rebound in your credit score as accounts are settled because a settled account, even if for less than the total originally owed, is better than an outstanding or delinquent account.

Lastly, if you are considering debt settlement as an option, a better question to ask isn't simply, "Will is lower my credit score," but rather, "Is it worth lowering my credit score to settle the account." If you have a significant amount of debt and know you can save 'thousands' or 'tens of thousands' of dollars through a settlement, it may be worth the extra few points in interest you might pay on a new loan to settle your delinquent debt.

You want the item on the credit report to state, Paid. Do not accept anything less.
Actually, it would be better if you could get them to delete the item when you pay it off. Send them a 'pay for delete' letter via certified mail. If they agree, make sure you have it in writing. I also suggest you offer less than is owed, 35 - 50% of total debt.

Know that your credit scores are marked according to the age of the history. If you are wanting to fix your credit score for a possible loan, do not pay on anything over two years inactive. Doing this will bring the account current and negatively affect your credit score more. If you are looking for long term credit repair (not a loan soon) than pay the charged off account off. There are three main credit bureaus -- Transunion, Experian, and Equifax -- and that they give you a grade on your credit-worthiness according to what your creditors report to them. While each of these three bureaus may have some small variables that differentiate their scoring, the FICO scoring model is still the heart. FICO stands for Fair, Isaac and Company, the group that designed the model. Here is how they say the score breaks down:
  • 35% - payment history
  • 30% - amounts owed
  • 15% - length of credit history
  • 10% - types of credit
  • 10% - new credit


Getting a credit report is quite simple, but getting your credit score can be much trickier. Make sure any company you pay to send you your credit report is also sending you the credit score, so you know the exact number that lenders are receiving. (Most companies will charge extra to show you the scores.) Credit.com is one place that will send you a credit report and your credit score for free -- but you have to remember to cancel your membership within their 30-day period, and you only receive one of the three bureau's reports. Credit Resource Corp. refers their clients to an Annual Credit Watch Program that will give you 24/7 access to your updated credit reports and credit scores from all three bureaus without causing a HARD INQUIRY. Most delinquencies aren't reported to the credit bureaus until after they are 30 days late. This allows for a small grace period - which is supremely helpful to folks who aren't adept at organization. What's valuable to know is that delinquencies which occurred within the past 2 years are of greater weight than older items. That means that if you see an item sent to collections, it might actually hurt you to pay it off during the loan process if it's more than two years old. Why? Because paying collections will decrease the credit score due to the date of last activity becoming recent. But if you do decide to pay off a collection, MAKE SURE that the creditor gives you a letter of deletion first. If, however, you have any recent accounts with past-due amounts, paying them off immediately will help your credit score. Again, if you do decide to pay off a collection, MAKE SURE that the creditor gives you a letter of deletion first.
Here are more opinions and answers:
  • Yes, it could. Although credit card companies may encourage you to settle your debt with the help of a credit counseling service or a debt repayment plan, as an alternative to bankruptcy (where they may get nothing), this step would still become part of your credit history. According to the FTC, "the use of debt counseling may appear on your credit report. Some creditors consider this activity negatively; some may consider it as a positive step."
  • In addition to the above, Creditors will sometimes offer you a straight settlement through their collections department (I know, I used to be a collector) and I strongly advise you to NOT TAKE IT. Although it may sound nice to give them a one time payment and be done with it, the debt will show on your credit report as SETTLED. Other lenders will look at that and not be as willing to lend you money down the line (or an apartment, job in finance, etc.) for fear that you will not be willing to repay the full amount you owe them. Credit Management however is only a temporary mark on your credit. As soon as you are done with the program, the mark falls off. Most Credit Management companies will have you sign an agreement that you will not open any more lines of credit or loans while on their program anyway though, so it isn't that big of a deal. No one will be looking at you.
  • Relax. Two years from now (2009) greater than 40% of the population will have poor credit scores based on todays credit rating system. This means that the banks will be forced to lower their credit rating standards if they want to obtain new business (lending). Considering that it is the banks who first created the profitable cycle (for them) of organized periods of boom then bust at the expense of Joe citizen, it would be a moral hazard for you to pay them anything. The banks have avoided any recent possible losses by raping the U.S. treasury, your money, and now they want you to continue paying them. This is double dipping. Go ahead and forsake your credit score today because the system will change and in two years you will be allowed credit again.
  • Yes, almost anything will for a short time. Your score moves up and down like a
    merry go round. But if you follow the advice above it will bounce back quickly.
    EX- I charged 10.000 in June on a card but paid it in full ex for 5.00 in July, my score went from 748 in June to 720 in July and the to 740 in august.
  • Find financial consultation for free, there are many financial institutions that provides consultation for free. Try visiting totaldebtservices.com
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