Is debt settlement worth it?

Settling a debt can help if you’re out of options, but paying in full or negotiating with your creditors are better for your financial health


Is debt settlement worth it? It can be if you have no other options for paying off credit card debt. But it’s best to find a way to pay in full because your debt won’t go away. If that fails, there are other options to help you avoid a debt settlement.

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Dear Keeping Score,

I have several closed credit card accounts. They’ve started offering settlements. If I pay the settlements will it help my score go up over time? Will it fall off my credit report? – Ashley

Dear Ashley,

There may be no one on the planet who enjoys a bargain as much as I do! Paying less than the full amount owed to a creditor certainly sounds like a good idea.

On top of paying less, I would be avoiding the nasty collection process, the expense of a court judgment and possibly even having my wages garnished. But a debt settlement also has its downside and is not to be confused with a free lunch or a debt sale.

The fact that you have several closed credit card accounts, which are probably charged off (since they are offering settlements), tells me that your credit score has likely taken a serious nose-dive. If you can negotiate settlements that will effectively pay off these cards, it probably won’t do much for your score.

Check out all the answers from our credit card experts.

Ask Steve a question.

How much does debt settlement affect your credit score?

Unpaid debts fall under the payment history part of your score, which accounts for 35% under FICO’s traditional scoring model. The damage of a delinquency and a charge off have already taken their toll on your score. Paying the account won’t repair the damage you have already done.

However, having a trade line on your credit report that says “debt settled” may place you in a better light with a future lender than having a trade line that says “unpaid charge-off.” Why? You’re better off with a late (even very late) payment than a record of stiffing those foolish enough to lend you money. Plus, over time (a whole lot of time) and with good credit practices moving forward, your score will eventually go up.

If in your settlement negotiations you can get the creditor to report to the credit bureaus with a “paid as agreed” notation, that will immediately boost your score.

See related: What is a good credit score?

How long does a debt settlement stay on your credit report?

As for when these items will fall off of your credit report, the delinquencies and collections that brought you to this point will stay on your credit report for seven years, whether you settle or not.

One note for my other readers: Medical bills are treated differently from your garden variety delinquent accounts (like credit cards). The three major credit reporting bureaus (Experian, TransUnion and Equifax) all delay reporting unpaid medical accounts for 180 days. The bureaus recognize that medical bills can take longer than other bills to dispute or submit to insurers for payment.

Additionally, FICO 9, VantageScore 3.0 and 4.0 all ding your score less for an unpaid medical bill than they do for a nonmedical debt. FICO doesn’t count any medical bill under $100 at all. Once a reported medical debt is paid, unlike the debts discussed above, they are removed from your credit report and will have no further impact on your score.

Debt settlement alternatives

The key here is what you are doing right now and what you decide to do about these accounts. Have you established good credit practices that will enable you to pay all of your bills, on time, as agreed? If not, paying out lump sums of cash will just weaken you financially and make it more difficult to manage new bills if you haven’t brought your spending in line with your income.

Negotiate with your lenders

The best thing for your credit score will be to pay these accounts off in full. But how? I understand that you don’t have a pile of money to throw at these cards. If you did, you wouldn’t be in this situation (at least I hope you wouldn’t). So, what you need is an affordable option for paying off these cards.

You could try negotiating with each lender to see what they could offer you in terms of hardship programs or other repayment options. Even if you are in the hands of a third-party collection agency, I suggest that you contact the original creditor and ask them to take the account back. They could save a commission on the debt and recover a customer as well.

The Federal Trade Commission notes that even if the debts have been turned over to a third-party collector, sometimes the lender will still work with you. It is always better to work with the original lender if you can, but it can be difficult if a third party is already involved.

Credit counseling

Another option for taking care of this debt that the FTC and I recommend is nonprofit credit counseling. You can call one of the good guys at the National Foundation for Credit Counseling, and they will use their existing positive relationships with creditors to help you out.

Your accounts may be eligible for a debt management plan (DMP), which is a systematic way of paying the cards off in full based on your income over a period of one to five years. One consideration to take into account with a DMP is that the cards must be closed to be enrolled, but you are already at that point with these cards, so it may not be a drawback for you at all.

Your credit counselor will go over your entire financial situation to find the best option for you. If a DMP is not right for you, they will tell you that and what your other options are. And they’ll do it for free.

See related: 8 things you must know about credit card debt

Is debt settlement a good idea?

From my point of view, debt settlement is not a good idea, especially if you have another choice available. However, if you find you’re “out of aces,” settling a debt is better than trying to bluff your creditors with a bad hand. (My apologies to “The Gambler,” Kenny Rogers.)

Whatever you decide, know that you must do something. These debts will not go away on their own.

Remember to keep track of your score!

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The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

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