Is It Better to Pay Off Debt or Settle It?

Quick Answer

It's always better to pay off debt in full than settle debt. But if you can't afford to pay in full, settling your debt can be an alternative that won't damage your credit as much as not paying at all.
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It is always better to pay off your debt in full if possible. While settling an account won't damage your credit as much as not paying at all, a status of "settled" on your credit report is still considered negative.

Settling a debt means you have negotiated with the lender and they have agreed to accept less than the full amount owed as final payment on the account. The account will be reported to the credit bureaus as "settled" or "account paid in full for less than the full balance."

Here's what you need to know about the credit impact of settling debt.

Is Paying Off or Settling Debt Better for Your Credit?

In general, paying off the total amount of debt you owe is a better option for your credit. An account that appears as "paid in full" on your credit report shows potential lenders that you have fulfilled your obligations as agreed, and that you paid the creditor the full amount due.

Accounts remain on your credit report for up to 10 years when they're closed in good standing (meaning no late payments). Positive payment history on those accounts—the most important factor in your credit score—will continue to strengthen your score during that time. The growing length of your credit history can also have a positive impact on your score.

You can pay less than the full amount owed if you negotiate with a lender to settle the debt. Debt settlement companies offer the option to settle debt on your behalf for a fee, but there are many drawbacks to this process, including shattered credit and high fees. Instead, negotiating with lenders on your own—or considering a debt management plan organized through a nonprofit credit counseling agency—may be better options.

No matter how you settle debt, anytime you don't repay the full amount owed, it will have a negative effect on credit scores. The "settled" status will remain on your credit report for seven years from the original delinquency date of the account. If the account was never paid late, the "settled" notation will stay on your report for seven years from the date the debt was settled.

It's important to know that if the account was in collections, and you either paid it off or settled it, your credit score won't necessarily improve right away. The collection account will stay on your credit report for seven years, and older FICO® Score models factor this notation into your score even if the balance on the account is zero.

How to Start Paying Off Debt

You have many options to pay off debt that isn't already in collections. Start out by getting clear on how much you owe and how much you're paying in interest on each debt. If you have the money to pay extra on your accounts to reduce their balances, try paying down the debts with the highest interest rates first (using the debt avalanche method); you can also pay off the smallest debts first (using the debt snowball method) if that will help keep you motivated to pay off your debts.

If you'd prefer to simplify your debts and potentially reduce their interest rates, look into a debt consolidation loan, which lets you combine multiple accounts into one and make a single set monthly payment to pay them off. A balance transfer credit card may also be an option if you qualify. These cards allow you to consolidate credit card debt with a single card and pay it off at 0% interest for a period of time.

Debt already in collections requires specific payoff strategies. First, contact the lender and explore your options for making a lump-sum payment to settle the debt or creating a payment plan to pay off the debt. If the creditor has sued you to get back the amount owed, it's a wise choice to hire a lawyer to help. A nonprofit credit counselor can also give you advice on the best way to handle a debt in collections, and on which payoff strategies make the most sense for your finances.

How to Get Extra Help With Debt

Debt payoff can seem overwhelming and complicated, but there are many resources that can guide you. A good place to start is, again, a nonprofit credit counseling agency, where you can receive a free initial consultation and get help with budgeting and debt reduction strategies. If you're not only dealing with debt collectors but you're also involved in a lawsuit related to your debt, a lawyer experienced with consumer debt issues is the best person to work with; you can find free local legal assistance through the Legal Services Corporation's search tool.

If you're feeling burdened by debt and you're unable to pay for basic needs, call 211 to connect with services in your area that may offer rent, mortgage, utility or medical bill assistance. Other types of financial assistance may be available from the federal or state government, and you can take a look at the programs you qualify for at

Don't forget to engage with organizations that work with specific populations you might be a part of, such as Military OneSource, which serves military families and offers financial and legal resources.

Understanding Your Debt Payoff Options

While it's best to pay off debt that's in collections rather than settling it, both options are far more beneficial than ignoring the debt completely. You should give yourself credit for reaching the point at which you're ready to face your debt and get rid of it. While it may take time and effort, the promise of being debt-free is a meaningful, and realistic, goal to pursue.