Will Settling a Debt Affect My Credit Score?

Quick Answer

Debt settlement, when you pay a creditor less than you owe to close out a debt, will hurt your credit scores, but it's better than ignoring unpaid debt. It’s worth exploring alternatives before seeking debt settlement.

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Debt settlement—negotiating forgiveness of a financial obligation in exchange for partial repayment—can ease financial burdens, but it will harm your credit. And, if you hire a so-called debt-relief company to help, it will likely be expensive.

Even if you avoid high fees by pursuing settlement negotiations yourself, you should be aware that seeking debt settlement is risky. For starters, creditors may refuse to work with you (or any company you hire) to settle your debt. Also, reaching a debt settlement often involves racking up delinquent payments that damage credit scores. And settling an account instead of paying it in full is seen as negative because the creditor agreed to take a loss in accepting less than what it was owed.

Why Settling an Account Is Better Than Not Paying at All

Despite the potential downside, settling a debt by making partial repayment is better for your credit (and peace of mind) than neglecting it and leaving it unpaid. If you ignore a debt, the creditor will typically turn it over to a collection department or third-party collection agency.

Accounts in collections are typically listed on your credit report and will hurt your credit scores. What's more, collection agents can be relentless in their use of phone calls and emails seeking payment. They can also sue you and, if successful, garnish your wages, seize your bank accounts or have a lien placed against your property for the amount you owe.

How Long Do Settled Accounts Remain on Your Credit Report?

As with most other negative credit report entries, settled accounts stay on your credit reports for seven years. The starting point for the seven-year countdown depends on the status of the account when it was settled:

  • Accounts with late payments: The settled account will expire from your credit report seven years from the original delinquency date, or the first late payment date after which the account was never brought current.
  • Accounts with no late payments: If the account is in good standing (reflecting no late payments) at the time of settlement, it will expire from your credit report seven years from the settlement date.

This may suggest it's beneficial to miss payments intentionally before seeking account settlement to hasten removal of a settlement entry from your credit reports, but be aware that:

  • Each delinquent payment does its own damage to your credit score, and the first late payment on an otherwise unblemished credit history can be especially damaging.
  • Settling an account in good standing may not be an option in any case, as some creditors won't even consider debt settlement until you've missed one or more payments, and so-called credit repair companies typically instruct you to stop making payments to your creditors, which leads to delinquencies.

How to Avoid Debt Settlement

If you feel unable to repay a debt in full, there may be better alternatives than debt settlement. These options are worth considering:

Debt Consolidation

If your credit is good, debt consolidation can bring relief from high-interest debt. Using proceeds of a personal loan or home equity loan with a relatively low interest rate to pay off multiple high-interest card accounts can bring significant savings in interest charges.

Replacing multiple credit card bills, with minimum payment requirements that change each month, with a single, predictable fixed payment also can make budgeting easier. Just make sure you don't run up new credit card balances.

Debt Management Plan

A debt management plan (DMP) is a repayment plan arranged by a nonprofit credit counseling agency. Under this arrangement, the agency reviews your finances, helps devise a payment plan you can afford and then works with creditors to arrange for repayment over time. You make one monthly payment to the credit counseling agency, and they distribute payments to your creditors.

The agency often charges a modest upfront fee and collects additional fees from your payments, but costs typically are less than you'd pay a for-profit debt-relief company. Note that credit card issuers may require you to close the accounts that are part of your DMP, limiting your access to credit and potentially hurting your credit scores. The National Foundation for Credit Counseling and the Financial Counseling Association of America provide lists of reputable, certified nonprofit credit counselors who can help you set up a DMP.


If a temporary financial hardship is making it hard to pay your debt, lenders may be willing to extend forbearance. This is a short-term reduction or suspension of your monthly payments and/or a waiver on interest charges and fees.

Lenders typically only grant this option if asked and limit it to borrowers with good credit who can show that they'll be able to resume regular payments within six to 12 months. This option will extend the amount of time it takes to repay your debt, however.

Loan Modification

In a loan modification (also called a workout agreement when applied to credit cards), the lender permanently restructures your borrowing terms. The goal is to make monthly payments more affordable, but it may have other, less appealing consequences. Credit card issuers may reduce your borrowing limit, while issuers of installment loans may extend your borrowing term, adding extra payments over the life of the loan and increasing your total interest costs.

How to Improve Your Credit Score

Whether you're pursuing debt settlement, trying to avoid it or working to recover from its impact on your credit scores, taking steps to improve your credit is important for your long-term financial security. Here are some tips for building your credit scores:

  • Make all payments on time going forward. Payment history—the record of your monthly debt payments, and whether they are made on time or delinquent by 30 days or more—is the most important influence on your credit scores. There's no habit that's better for your credit than paying debts on time every month, without fail.
  • Pay down revolving-account balances. The second most significant influence on credit scores—and the one scores respond to most quickly—is amounts owed, including credit utilization rate—the percentage of the credit limit you're using on revolving-credit accounts such as credit cards. If you have high balances on one or more revolving accounts, paying them down will improve your utilization rate and your credit scores will tend to follow suit.
  • Address relevant risk factors. If you get your credit report and score for free from Experian, study the risk factors provided with your score. These factors explain the top reasons your credit score isn't higher (and sometimes also tell you the circumstances helping your score the most). They can help you see what you can do to improve your credit scores.
  • Enroll in Experian Boost®ø. Experian Boost lets you add recurring household payments to your Experian credit history, and that can help your FICO Score. Eligible bills include rent (if paid online); gas, electric and water utility bills; streaming media subscriptions; and cellular or landline phone bills. When you enroll in Experian Boost, you may see immediate FICO® Score impact.

The Bottom Line

Debt settlement is risky and harmful to your credit. Before pursuing it, make sure you understand the potential consequences. Consider meeting with a certified financial counselor or an attorney familiar with debt negotiations to review all your options. If you pursue debt settlement, check your credit report throughout the process to be sure the status of each account is reported accurately.