How Will Debt Settlement Affect My Credit Score?

A woman holds a down arrow
••• © XiXinXing / Getty

Dealing with past due debts can be difficult. If you can't afford to pay a debt in full, you may negotiate a lower lump sum payment - or a debt settlement - with your creditor. Debt settlement means you’ve made an agreement with your creditors to pay less than the balance due to satisfy your debt. For example, if your credit card issuer agrees to accept a $2,000 payment on a $5,000 debt. When you settle a debt that's on your credit report, it can affect your credit.

How Will Debt Settlement Affect Your Credit?

Most of your credit and loan obligations are reported to the credit bureaus each month. Your account status is listed on your credit report indicating whether your payments are on time, late or whether the account is closed.

When a debt is settled, the creditor updates your credit report to show a status of “Settled” or “Paid Settled.” While a "Settled" status is slightly better than an "Unpaid" status, any payment status other than “Paid as agreed” or Paid in full” can hurt your credit.

Because you aren’t paying your full balance as agreed, debt settlement will have a negative impact to your credit score. Your credit is based on several different factors, so the exact impct on your credit can vary depending on the other information on your credit report. However, we do know that debt settlement can have a significant impact on your credit score.

What FICO Says About Debt Settlement and Your Credit Score

Credit scoring companies don't give us a lot of specific details about how credit scores are calculated or how much specific activities affect a person's credit score. Here's what we do know. In 2009, FICO released FICO score loss information based on two hypothetical consumers with different credit scores. In one scenario, a person with 680 credit score (who already had one late payment on the credit card) would lose between 45 and 65 points after debt settlement for one credit card, while a person with a 780 credit score (with no other late payments) would lose between 140 and 160 points.

Your credit score might experience a similar drop if you have a credit profile similar to these scenarios and you’re settling only one debt. Your credit score could fall lower if you settle on multiple accounts.

You can better predict the impact of a late payment on your credit score using the FICO Score Simulator, available when you purchase the FICO Score Watch from

Late Payments Preceding Debt Settlement

Debt settlement will hurt your credit score more if the credit cards you settle are already in good standing and if you end up settling multiple credit card accounts.

Many debt settlement companies will advise you to purposely fall behind on your payments so creditors will be more willing to accept a settlement payment on the debt. (Lenders are usually only motivated to settle debts that seem at risk of never being paid.) Following the debt settlement company’s advice means several months of missed payments which hurt your credit even before you settle the debt.

Debt settlement information will remain on your credit report for seven years, but will have less of an impact on your credit score the older the information gets and as more positive information is added to your credit report.

Rebuilding Your Credit After Debt Settlement

Keep in mind that the goal of debt settlement is to get rid of some of your debt, particularly if you can't afford to pay all the balances in full. That may mean that you temporarily sacrifice your credit score - especially if you're not looking for a major loan right now - for the sake of getting out of debt. 

Once you've settled the balances, you can focus on rebuilding your credit score. Since credit is based on borrowing, you’ll have to use credit cards or loans to rebuild your credit. Responsible borrowing and timely payments are key to achieving a good credit score and staying out of debt.