According to Barry Paperno, consumer operations manager of Fair Isaac, the company that issues FICO scores, settling your credit cards will hurt your credit score. However, just how much your score will be hurt varies, depending on your credit report's condition prior to the settlement.
Considerations
A settlement on your credit report counts as negatively as a bankruptcy, since in both cases, your creditors did not get paid the full amount they were promised. However, if you have multiple negative items on your credit report, a single settlement will have less of an overall effect on your credit score. If the settlement is the lone negative item on your credit report, it will have a much greater negative effect on your credit score.
Time Frame
While settlements are viewed as negatively as bankruptcies, one bit of good news is that they do not stay on your credit report as long as bankruptcies; therefore, they will affect your credit score for a shorter period of time. Financial expert Liz Pulliam Weston advises that settlements stay on your credit report for about 7.5 years, while bankruptcies stay on your credit report for 10 years.
Warning
You may feel that settling your credit cards is the right thing to do, but if your account is already severely delinquent, payment may actually hurt your credit score more than simply ignoring that delinquency. While delinquency is certainly a negative mark on your credit report, your credit score also takes into account the concept of "recency," or how recently a negative event has happened on your report. Settlement makes the initial negative report of delinquency seem as though it took place very recently, because it is recent activity on the account.
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