Does It Affect Your FICO Score Differently If You Settle a Debt Versus Paying It In Full?

 In Manage Money Wisely

Your credit report is definitely impacted differently if you choose to settle a debt rather than pay in full. When you settle a debt, you repay less than agreed under the original contract, which still shows you didn’t meet the terms of the contract. Therefore, a settled account is less positive than a paid account, which shows you repaid the total amount in full.

If you can do it, payment in full is always the best way to eliminate a debt. It means you have completed your obligation; you borrowed $2,000, agreed to pay it back and you did. This wipes the debt from your credit report and improves your score two ways: by reducing total debt and indicating good payment history. Those elements make up 65 percent of the score.

Consider these 3 points:

  1. When compared to settlements, your credit report and score will suffer less if you pay in full.
  1. You’ll reduce the chance of this bill reappearing in a year or two with a new collector, which is a vicious game that happens quite often in the credit world.
  1. You won’t owe the IRS money on the settled debt, which is a biggie people forget about. You probably didn’t know this, but you also can wind up with a tax bill if you settle for less than you owe. The IRS considers any difference between what you owed and what you settled as income. If you had a $5,000 credit card debt and settled it for $3,000, the IRS counts the other $2,000 as income. You and the IRS will both get a 1099-C showing that as income.

Now, with all that being said let me speak as someone who literally went from a seven figure business to scraping up change and having to make decisions on more than one occasion on whether I should settle or pay off a debt in full.

If you just cannot pay in full in one lump sum or even using a payment plan and you feel that your only option is to settle the debt, then do that. It’s much better than doing nothing at all and in the future, you can write a hardship letter explaining your previous circumstances and showing that you did the best you could with what you had.

rca3DOther “experts” may disagree, but I’ve lost everything before and ruined my credit in the process. When you’re trying to rebuild like I did, I
still believe in doing the best you can with what you’ve got. In my online course, Real Credit Answers, I walk you through the exact steps to use to rebuild your credit and regain control of your financiallife. Check it out! It might be just the start you’re looking for.

 

Patrice Washington

Patrice Washington

Known online as the Wisdom & Wealth Money Maven, Patrice C. Washington is author of the personal finance series, Real Money Answers, as well as creator of The Mindset + Money Master Class, a step-by-step formula to help you create the money mindset and skill set necessary for lasting personal finance success.
Patrice Washington
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