How Will Debt Settlement Affect My Credit Score?

Image shows a person holding a stack of bills and looking distressed. Headline and text reads: "Debt Settlement and Credit Report: debt settlement is an agreement with your creditors to pay less than the balance due to satisfy your debt; it's slightly better than an 'unpaid' status, but any status other than 'paid as agreed' or 'paid in full' can damage your credit; Because you aren't paying your full balance as agreed, debt settlement will have a negative impact on your credit score; Many debt settlement companies advise deliberately missing several months of payment as a way to qualify for debt settlement, which damages your credit"

The Balance / Ellen Lindner

If you can't afford to pay a past-due debt in full, you may negotiate a lower payment—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 you negotiate a debt settlement, your credit card issuer might agree to accept a $2,000 payment on a $5,000 debt. If the issuer is willing to come to the negotiating table, a lower lump sum may not be the only option to settle the debt.

However, when you settle a debt that's on your credit report, it can negatively affect your credit.

Credit Score Impact

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 the account is closed.

For instance, your credit card company will likely close your credit card after settling your debt. You could also have your credit limit reduced or eliminated altogether once the creditor realizes that you don’t plan to pay the balance in full.


When a debt is settled, a 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 damage your credit.

Because you aren’t paying your full balance as agreed, debt settlements impact your credit score negatively. Your credit is based on several different factors, so the exact impact on your score can vary depending on the other information on your credit report.

FICO Score Examples

A credit score is a measurement of the likelihood that you'll pay back the money you borrowed in the form of a loan, mortgage, or credit card. Credit scores also factor in how well borrowers pay their bills on time. A FICO credit score is a type of scoring model used to calculate your credit score and is used by banks, lenders, and credit providers in making a decision to extend credit to you or not. Your score also determines, in part, the interest rate and credit limit you'll receive on your credit products.

Credit scoring companies don't provide the exact details about how scores are calculated, and it can vary depending on the metrics used in the calculation. However, FICO released FICO score loss information based on hypothetical consumers with different credit scores. In one scenario, a person with a 680 credit score and 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 and 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 even further if you settle on multiple accounts.

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. The theory behind this strategy is the belief that lenders will only be motivated to settle debts that are at risk of not being paid. Following the debt settlement company’s advice means several months of missed payments, which damage your credit even before you settle the debt.

Debt settlement information will remain on your credit report for seven years, but it 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

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.

But remember that debt settlement can stick you with an unexpected bill. The federal government requires you to pay taxes on cancelled debt, including debt that's been cancelled through credit card debt settlement. That means you’ll either get a smaller refund check or owe more money to the IRS.

Frequently Asked Questions (FAQs)

Can I do debt settlement on my own?

It may be a daunting task to negotiate and settle debt with creditors, but it's not impossible. To begin negotiating credit card debt, you have to understand why credit card companies are willing to negotiate. You need to know what options are available to you, and be aware of the disadvantages to settling. Once you start the process, make sure to be persistent and document every step of the way and the settlement deal in particular.

How long will it take for credit scores to improve after debt settlement?

After debt settlement, it's important to remember that it will remain on your credit report for seven years. However, you can begin improving your credit score right away. You can do that by adding positive history to your credit report. That includes paying your bills on time, paying off other past debts, and keeping your credit utilization low.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Federal Trade Commission. "Settling Credit Card Debt."

  2. Consumer Financial Protection Bureau. "Key Dimensions and Processes in the U.S. Credit Reporting System: A Review of How the Nation’s Largest Credit Bureaus Manage Consumer Data," Page 15.

  3. Consumer Financial Protection Bureau. "What Are Debt Settlement/Debt Relief Services and Should I Use Them?"

  4. MyFICO. "What's in My FICO® Scores?"

  5. MyFICO. "How Credit Actions Impact FICO Scores."

  6. Experian. "Negotiating a Settlement Amount on an Account in Good Standing."

  7. Federal Trade Commission. "Coping With Debt."

  8. Experian. "How Long Do Settled Accounts Stay on a Credit Report?"

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