How Much Will Settling a Credit Card Debt Hurt Your Score?

When you make purchases on your credit card, you arent only responsible for the amount you charge, but also the interest charges on your purchases. CNN reports that, as of 2011, the average credit card interest rate is almost 15 percent -- an increase of over 20 percent from 2009. When credit card debt creeps up on you, settling your debt is an option, but doing so could wreak havoc on your credit rating.

Settling with Creditors

Not all credit card companies offer consumers who are behind on payments a settlement agreement. If your creditor makes that offer, however, it doesnt come without consequences. Settling a credit card debt rather than paying off the account in full demonstrates to future lenders that you cannot be trusted to meet your financial obligations -- and your FICO score will reflect this fact.

Credit Damage

The damage your credit sustains after settling a credit card debt will vary depending on how high your score was prior to negotiating a settlement. While there is no way to know for sure how many credit points you will lose, the higher your credit score is currently, the greater the damage it will sustain after a settlement. In general, you can expect to lose anywhere from 50 to over 100 points after settling your defaulted credit card debt.

Settling with Collectors

If your credit card company does not offer you a settlement and instead sells your account to a debt collector, settling the debt doesnt have the same negative impact that it would if you had done so prior to your account going into collections. When a creditor sells your debt to a collection agency, the collection agency reports the sale to the credit bureaus -- resulting in a collection account appearing within your credit file. The presence of a collection account has a significant negative impact on your scores. Because a paid collection is just as derogatory as an unpaid one, settling with a collection agency has little effect on your credit rating either positively or negatively.

Improvement over Time

The damage to your credit from a debt settlement isnt permanent. The Fair Credit Reporting Act limits the credit bureaus to reporting most derogatory information for no more than seven and a half years. Thus, practicing good debt management habits and taking care not to let your debt get out of control in the future will help you rebuild your damaged credit score and enjoy a much better credit rating when the negative information finally falls off your report.