Paid in full vs. settlement on your credit report

If you’re finding it hard to keep up with your debt payments or have some past-due accounts, it’s natural to feel concerned about what might happen next. Falling behind can impact your credit score and may lead to aggressive collection efforts from your creditors, including the possibility of legal action. As you explore your options, you might be weighing whether to pay off your debt in full or try to settle your accounts for less.

As you try to figure out a solution, you may wonder if you should pay off your debt in full or settle your accounts. We’ll explain the difference between the options and the impact they can have on your credit score. We’ll also offer practical debt repayment strategies and tips to help you escape your financial hole sooner.

Paid in full vs. settled in full

When you pay your account in full, you submit 100% of the principal, interest, and fees owed to your creditor. When you settle your account in full, you submit less than 100% of the amount owed to your creditor. 

The amount you pay depends on the settlement deal you (or a third party) negotiate. While both options mean you no longer owe that debt, they impact your credit report and score differently.

Paid in full vs. settlement on credit report: Which is better?

Paying in full is much better for your credit than settling the account because it demonstrates financial responsibility. Consistent, on-time payments are the cornerstone of good credit.

While negotiating a settlement may be the best thing for your financial situation, it could signal to lenders that you’re willing to shirk your obligations. Settlements will stay on your credit report (and lower your score) for seven years.

In addition, if you work with a third party to negotiate settlements, they may ask you to temporarily stop paying your creditors and start putting that cash into an account to facilitate lump sum payment deals. During this time,  your credit score could plummet, you may be bombarded by calls from collection agencies, and you may even face legal consequences. 

As a result, it may be difficult to qualify for a loan with favorable terms in the future — if you can qualify at all. Fortunately, the effects of the settlement lessen over time, even before the account drops off your report. 

Still, settling your account for less than the full balance due is better for your credit than ignoring the debt. Pretending that the debt doesn’t exist will worsen your financial struggles. Plus, lenders may view a settlement as an acknowledgment of your responsibility and appreciate that you made at least some effort to repay your debt.

How to decide which is right for you

When paid in full makes sense

If your accounts are still in good standing (or you haven’t fallen too far behind) and you can come up with the cash required, you should pay your accounts in full. Doing so will preserve your credit score, helping you maintain future financial flexibility. 

When to consider settling your debt 

If you can’t afford to pay in full and are several months behind on your payments, settling your debt is the next best option. Then, it’s just a matter of who negotiates the deals – you or a third party, such as an attorney or debt settlement company.

If you feel confident in your powers of persuasion, you may want to work with your creditors directly. Be honest about your situation, express a willingness to pay what you can, and ask for their best deal.

Negotiating your own settlement means less back and forth with a middle person, which helps to ensure no details get lost in translation. Plus, you can save a lot of money in fees and reduce credit score damage by taking a DIY approach.

But if you feel overwhelmed by the process and nervous about speaking with your creditors, hiring a third party may be a wise move. A lawyer specializing in debt resolution or a debt settlement company has a lot of practice negotiating deals and may have longstanding relationships with many creditors. Their know-how and connections could translate into favorable settlement agreements.

Important considerations before pursuing debt settlement are:

• You’ll likely have to pay a substantial fee for the service, eroding the savings from the settlement.
• It's possible any debt you don’t have to pay is considered forgiven and may be viewed as taxable income, potentially increasing what you owe.
• There’s no guarantee that the third party will be able to negotiate a settlement. The creditor could refuse all offers and pursue alternate collection measures, including filing a lawsuit.
• There are many scammers trying to take advantage of financial hardship. Before you take any action – or send any money – be sure who you’re working with is legitimate. Ask for credentials, read reviews, and pay attention to red flags, such as promising a certain result.

Tips to tackle debt faster

Here are some best practices to manage your debt effectively, especially when you have a lot of it:

• Stop borrowing. You can’t climb out of a hole if you keep deepening it.
• Track your spending. Write down where every dollar goes for a month or two, and take note of patterns.
• Create a realistic budget. Give each dollar you have a job, ensuring a few dollars get earmarked for fun purchases.
• Reduce your discretionary spending. Eat most meals at home (including your morning coffee), cancel unused or underused subscriptions, and avoid online shopping unless you truly need something.
• Save on required expenses. Negotiate lower bills, shop sales, buy generic goods, and consider more drastic measures, such as getting a roommate or selling your car.
• Earn more money. Consider getting a second job, launching a side hustle, or selling belongings you no longer need or want.
• Commit to making larger debt payments. Put your extra money from your cost-saving and cash-earning measures toward your debt. 

Once you’ve laid the foundation, you need to choose a debt repayment strategy. Here are three popular options:

• Debt consolidation. If you have good credit, you may qualify for a personal loan with a low interest rate or a balance transfer credit card with a 0% introductory annual percentage rate (APR). You can use the new account to pay off high-interest debt, which can save money and shorten your path to debt freedom.
• Debt snowball. If you like quick wins to build momentum, the debt snowball method may suit you. With this strategy, you pay as much as possible toward the debt with the smallest balance first, making the minimum payment on your other accounts. Once that account is paid in full, you shift your focus to the next smallest debt and repeat the process until you’re debt-free.
• Debt avalanche. If you prefer to pay as little interest as possible, the debt avalanche method may be a better bet. With this strategy, you throw every spare dollar at the debt with the highest interest rate first, making the minimum payment on your other accounts. Once that account is paid in full, you shift your focus to the account with the next highest interest rate and repeat the process until you’re debt-free.

Pro Tip: Contact your creditors at the first sign of financial trouble. If you let them know about your cash flow issues before you miss a due date, they may be willing to reduce or postpone your payment to help you get back on track.

Frequently asked questions

Is it better to settle an account or pay in full?

Paying in full is usually better for your credit because it shows lenders you’ve met your original obligation, but settling can still be a good option if you can’t afford the full balance—it helps you resolve the debt and move forward.

Will my credit score increase after settlement?

Settling a debt can stop new negative marks from piling up, but it usually won’t boost your credit score as much as paying in full. However, it does remove the outstanding balance, which can help you start rebuilding your credit over time.

Is it better to settle a charge-off or pay in full?

Paying a charge-off in full is typically better for your credit history, but settling is often an acceptable alternative if you need relief; either way, addressing the debt is better than leaving it unresolved.

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Final thoughts

Having a lot of debt can be anxiety-provoking, especially when you’ve fallen behind on your payments (or you’re about to). Fortunately, you can escape the debt trap with some research, effort, and potential assistance from a third party.

When it comes to your credit report, paid in full vs. settled, paid in full wins every time. However, paying in full isn’t always possible. If you must settle your debt, be sure you can afford any settlement deal you agree to, and thoroughly research any third party you may work with before making a commitment.