Settling with a credit card company can shave 60 percent or more off of your original balance, but this might end up costing you much more in the long run, because it can wreck your credit score. Most creditors consider this a serious offense, and credit scoring models tend punish borrowers who do not repay a debt in full.
Identification
Assuming your creditor reports to the credit reporting agencies, settling an account will show up on your report as "settled in full." Lenders usually report this not as a way to punish the borrower, but because it is standard practice to report the status of an account as accurately as possible.
Effect on Credit
A debt settlement does not automatically ruin your credit. Bad items like a debt settlement have a much larger impact on borrowers without other negatives in their credit history. A borrower with a score of 780 who settles an account, for instance, can expect to lose up to 125 points, according to Bankrate. A score of 680 loses 45 to 65 points.
Time Frame
Settled accounts show up on your credit report for seven years. Over time, settling an account may end up helping your score by getting you out of debt. A debt settlement has the biggest impact during the first two years after the incident and the damage might be less than constantly missing payments. Also, eliminating debt boosts your overall creditworthiness with lenders.
Tip
If you want to boost your credit score, try credit counseling in lieu of a debt settlement plan. A counselor might help you work out a budget to meet your credit card payments and/or work with creditors to lower your monthly bill. When counseling cannot help, consider bankruptcy before jumping into a debt settlement plan, suggests Don Taylor of Bankrate. Bankruptcy, while worse than a debt settlement plan, may boost your score because you can wipe out unsecured debt and eliminate bad history on those accounts. The credit bureaus will report discharged accounts as "included in bankruptcy."
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