When a person takes out a line of credit with a credit card company, he is required to make regular payments on the card at a previously agreed rate of interest. If the cardholder doesn't make these payments on time, he will face additional penalties. Sometimes, to get out of debt, the cardholder will attempt to negotiate a settlement with the company. An accepted settlement will usually hurt the cardholder's credit score.
Credit Score
A person's credit score -- the measure of his creditworthiness -- derives from his credit report. This report records all loans that the person has taken out in the past and whether he has paid them on time. The more consistently a person pays his bills, the better his credit rating. If a person pays a debt for less than the full amount, even if the settlement is agreed to by the creditor, this will hurt the person's credit score, as it makes him appear a greater credit risk.
Credit Reporting
When a person takes out a line of credit, this credit is noted on the person's credit report. In addition, any time that the person takes out a loan against this line of credit, this loan is noted as well, as are all repayments of the loan. This is because credit reporting agencies, which assemble these reports, are notified by the creditors that issue loans. So, a settlement will certainly be recorded on a person's credit report.
Settlement
Even if a credit card company agrees to let a person pay less than the full amount he owes on a debt, the person, in the eyes of a credit reporting agency, will appear to be a riskier credit risk. By the agency's logic, if the person didn't pay the full amount he owed on one debt, he will likely not pay the full amount on others. Therefore, his credit rating will fall.
Considerations
A creditor is not legally obligated to report a settlement to a credit reporting agency as a settlement. In fact, a creditor can report to the agency that the debtor paid the debt in full, even if he did not. Sometimes, as a condition of the settlement, the debtor will demand that the creditor report the settlement as paid in full or in another way that will not harm the debtor's credit rating as much.
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