Credit Card FAQ

Will Settling Credit Card Debt Hurt My Credit?

28 January 2011 by CreditCardsCo™

Many people face a time where it becomes difficult to pay their credit card bills. Whether they ran into circumstances that changed their income or they simply did not realize what they were getting themselves into when they made the purchases, it is common to have difficulties making the payments.

Regardless of the reasons for not being able to pay your credit cards as agreed, it is important to know what your options are. Consumers need to be aware of how different decisions can affect their credit reports and impact future purchases. Oftentimes when companies offer ways of helping to take care of credit card debt, they don't indicate the possible negative effects.

What Are My Options?

When you can no longer pay your credit cards as agreed, you do have several options. One is to ignore them and hope they go away. This does not work, but is still what many people choose to do. This will lead to the account being sent to collections. Another way is to try to consolidate debt. There are different ways to consolidate. Some don't impact a person's credit history at all, and others appear negatively. Settling debt is a very common way to handle it.

What Does It Mean To Settle On Credit Card Debt?

Settling is something that is usually offered by a collection agency. This is their attempt to get paid something when your payment history shows they aren't likely to be paid in full. Settling means the collection agency comes up with a reduced amount for you to pay. For example if you owe $1,000, a collection agency may request payment for $800. They'll present it as though they're cutting you a deal and they'll only be able to do it if you pay right away and in full. Of course, it is a bit of a deal to not have to pay the full amount, but you'll pay for it in a different way.

What Are The Consequences Of Settling On Credit Card Debt?

If you settle on an account, it will be reflected on your credit report. A normal account with no derogatory activity will have a note stating, "paid as agreed" on your report. An account that has been referred to a collection agency for payment will indicate that it was sent to collections. And similarly, an account that was settled will indicate that it was settled for less than what was owed. This may not sound like a big deal to you, but it will be a big deal to future creditors with whom you try to do business.

A settled account will have a negative effect on your credit score. So, not only will the words be blatantly written on the account for future creditors to see, but the effect will be shown in your score. Granted, a settled account has less of a negative impact than an unpaid collection; you do get some credit for actually paying something. But, your score will be impacted. This can be fixed over time, of course, by making all the rest of your payments on time and being careful with credit. As the account gets older, the weight it has on your score will decrease.

A settled account appears as a red flag to banks who might be considering lending you money. It shows your history of not paying as agreed. Your history is the only way a bank can determine what sort of payer you are. It indicates to them how serious you are about paying your bills and whether you'll pay as agreed on their account.

So, while it's better to pay something than nothing, if possible, it's best to pay the account off as agreed, or to pay the collection in full, if it gets to that point.

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