Does Debt Settlement Hurt Your Credit?

Yes, debt settlement will hurt your credit, but that shouldn't be an instant deal breaker. Find out how much debt settlement will affect your credit score, if it's a good idea to settle your debt and discover alternative debt relief options.

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There are few things in this world that can do more damage to your credit than hiring a debt settlement company. When you work with a for-profit debt settlement agency, you’ll have to stop paying your creditors for several years and, as a result, your scores will take a major nosedive.

There are other ways to approach debt settlement, however, that won’t drag your credit scores through the mud. If you’re at risk of falling behind on debt payments, or you’re facing a lawsuit for an unpaid bill, working with a reputable nonprofit credit counseling agency or negotiating directly with your creditors can help you avoid further damage.

Why Debt Settlement Affects Your Credit Scores

If you’re judging from the name alone, debt settlement probably sounds like a way to end your debt problems once-and-for-all. Unfortunately, that’s not how it works for most people.

For those who work with debt settlement companies, the outcome is often severe credit damage. Here’s how working with these companies hurts your credit scores:

  • Payment history: Missing just one debt payment can cost you major points, but on a debt settlement plan you’ll miss payments for years.
  • Credit utilization: Your debt balances and overall credit utilization are likely to increase due to late fees and penalty interest charges on unpaid debt.
  • Collection accounts: Once you fall behind by about 180 days, your open accounts will likely be closed and sold to debt collectors.
  • Financial instability: The goal of debt settlement is to pay less than you owe. Future creditors may not want to lend to someone who has a history of paying less than they owe.

“Debt settlement services have impacted my clients in mostly negative ways,” says Accredited Financial Counselor and owner of Journey Financial Wellness, Allison Sanka. “Many have found themselves in deeper financial turmoil due to the associated fees, penalties, negative impacts to their credit scores, and it impeded their ability to obtain credit in the future – the exact opposite of what they thought they were paying for.”

How Debt Settlement Works

Debt settlement can work in a few different ways. One way to settle debt is by contacting your creditors or debt collectors directly to negotiate settlement payments for less than what you owe. You can also hire a for-profit debt settlement company or work with a nonprofit to settle your debt.

If you go the for-profit route, which many people do, you’ll have to pay the debt settlement company a fee to take control of your accounts and eventually negotiate settlements on your behalf. The process typically takes three years, during which time late fees and interest charges could make your account balance soar.

Hiring a for-profit debt settlement company is not recommended for a few reasons: their services can be costly and put you at legal risk, you run a high risk of being scammed. Finally, it destroys your credit and there’s no guarantee the negotiations will be successful. Creditors are not obligated to accept settlement offers.

Should You Pay Off a Debt or Settle?

The choice of whether to pay off or settle debt depends on the details of the debt and your financial situation.

While paying off the full amount can be better for your credit scores, it’s not always helpful or possible. For example, full payment helps prevent credit damage if the debt is still owned by the original creditor but it might not help your scores at all if the account is already in collections.

Of course, paying off the full amount is also the more costly solution. However, if you hire a debt settlement company, the fees they charge for their services, along with the late fees you’ll accrue for stopping payments to you creditors, can be astronomical.

Here are some circumstances in which directly negotiating a debt settlement (without hiring a for-profit company) is a better option than paying off the full balance:

  • You’re already behind on payments and want to prevent further late fees, interest charges or a charge-off to collections.
  • Maintaining monthly payments and/or paying off the full balance would create a financial hardship for you.
  • You’ve received court papers stating the creditor intends to sue you.

Types of Debt You Should Settle

If you do decide to settle debt, you can do it on your own without shelling out cash to a potential scammer and destroying your credit.

In terms of debt types, not all unpaid debt is worth settling or even paying any money toward at all. For example, medical collection debt under $500 is no longer reported to the credit bureaus so it has no impact on your credit scores, and larger amounts of medical debt have limited impact on your scores. Additionally, some versions of your credit scores ignore collection debts under $100.

On the other hand, you may want to settle accounts that pose a direct risk to your finances. For example, if you receive documents stating you’re going to be sued, a settlement can be an effective strategy for preventing legal action. You may also want to settle if a creditor says you need to resolve an unpaid collection debt in order to qualify for new financing.

How Many Points Will My Credit Scores Drop?

There’s no way to know exactly how many points your credit scores will lose as a result of debt settlement. As a general rule of thumb, higher scores are more likely to be severely impacted by negative activity on your credit reports than lower scores.

While it’s hard to nail an exact number, if your credit score is above 700, you could see it fall as much as 200 points or more. Credit scores under 700 will see scores dip 100 points or more.

Here are a few things to know about debt settlement and your credit scores:

  • A single missed payment on a credit card or loan can cause a major loss of points.
  • Having credit cards and loans closed without being paid in full will hurt your scores.
  • Settling or paying off debt that’s in collections may not improve your credit scores at all.
  • Settling and paying debt does not remove the account information from your credit reports.

If a debt settlement company promises they can clean up your credit reports and get negative marks removed, it’s a scam.

“Clients have told me that debt settlement companies promised to negotiate lower amounts for their legitimate debt and have it removed from their credit reports,” says Sanka. “They were expecting this to happen immediately; however, negative items, even if paid in full, can stay on credit reports for up to seven years.”

How Long Do Settled Accounts Stay on Credit Reports?

Collection accounts stay on your credit reports for seven years from the date you most recently fell behind on the debt.

So if you stopped paying your credit card bill in January of 2024, the debt will appear on your credit reports until January of 2031, regardless of whether it’s sold to a debt collector, settled, or paid in full.

But initiating a debt settlement could prolong that timeframe. For example, if you agree to send monthly payments to a debt collector but stop paying before sending the full settlement amount, the seven-year timeline starts all over again.

The damage done to your credit scores, however, will diminish over time since older debt has less impact on your scores.

Can Debt Settlement Be Removed From Credit Reports?

Information that’s accurate cannot be removed from your credit reports. That’s because credit reports are meant to be an accurate record of your history with debt payments.

If you negotiate a debt settlement, your accounts may report as “settled,” or “paid in full for less than the full balance” on your credit reports, for seven years from the date you most recently fell behind. If you missed credit card or loan payments while working with a debt settlement agency, those missed payments will also show up on your reports for seven years.

Alternatives to Debt Settlement

Debt settlement might not be your best or only solution for dealing with debt. If you’re struggling to manage overdue bills, consider these alternatives to debt settlement before making a big move.

Debt Consolidation

Debt consolidation involves combining multiple debts into one account or one monthly payment. This can be done by paying off debt with a new credit card or loan or by working with a third-party that provides consolidation services.

Debt consolidation can be a good option for people who have some money to keep paying their monthly bills but need to lower their interest rates or payment amounts. It’s also a good option for people who don’t mind an initial drop in their credit scores in return for long-term improvements.

Just beware of for-profit debt consolidation companies, since they are often the same entities that offer paid debt settlement.

Read here to learn more about debt consolidation versus debt settlement.

Debt Management Plan

Debt Management Plans are a form of debt consolidation that primarily works for credit card debt. These plans are offered by nonprofit credit counseling agencies who work with your creditors to reduce the interest on your debt and put you on a new, more manageable payment plan with one monthly payment.

Going on a debt management plan can cause your credit scores to drop initially but unlike debt settlement, DMPs don’t require you to miss credit card payments so they don’t do the same long-term damage. In fact, your scores are likely to improve while you’re on a debt management plan.


If you’re struggling with loan payments, forbearance is another option to look into. With forbearance, the lender allows you to pause or reduce your loan payments for a set period of time due to a financial hardship you’re experiencing.

You might accrue interest charges during forbearance and, if your creditor reports your payment is not “current” (which some do) your credit scores could drop. However, they won’t drop as much as if you simply stopped paying the loan or went into foreclosure or repossession.

Loan Modification

Loan modification involves working with a lender to change the terms of your loan. For example, the lender may extend your payment timeline in order to reduce your monthly payments. In some cases, this option is only available if you’re already behind on your loan payment.

If you’ve missed payments on the loan, you’ve likely seen a big drop in your credit scores. But a modification can save you from a lot more credit and financial damage by preventing a foreclosure on your home.

Creditors’ Hardship Options

Each credit card company has its own policy on how to help struggling customers, but many have special hardship programs. If you’re behind on credit card payments, or think you’ll fall behind soon, call your creditor right away to see what can be done.

Just be sure to ask a few questions before agreeing to go on any payment plan. For example, you’ll want to know the exact cost of the plan, how you’ll be expected to cover any overdue payments and how it will impact your credit scores.


If you can’t afford to keep making your debt payments or you don’t earn enough money to pay all of your unsecured debt off within the next few years, it might be time to consider Chapter 7 or Chapter 13 bankruptcy.

While filing bankruptcy does a lot of damage to your credit and makes it difficult to qualify for financing for several years after you file, it also stops foreclosure and debt collection lawsuits, along with any other attempts to collect your debt.

How to Improve Your Credit After Settling Debt

No matter how much your credit scores drop, they can always be improved. You can rebuild your credit after debt settlement by adding new, positive information to your reports and avoiding actions that do damage.

Here’s how you can improve your credit scores after debt settlement or any other setback:

  • Make on-time payments on all of your credit cards and loans.
  • Have a relative or friend with good credit add you to their credit card as an authorized user.
  • Keep your credit card balances as low as possible.
  • As your scores improve, ask for annual limit increases on your credit cards.
  • Avoid opening and closing credit cards and applying for new loans.

Seek Advice From Professionals

It probably feels like you’d have to be an expert if you want to navigate debt settlement without being scammed, sued or damaging your credit.

Fortunately, you don’t have to know it all.

Instead, you can talk to a certified credit counselor for help. These counselors are experts in personal finance and credit. They can walk you through your options for free. So if you have questions about how to deal with debt collectors or fix your credit scores, or you want to know more about debt management plans, consider talking to a credit counselor at a nonprofit counseling agency first.

About The Author

Sarah Brady

Sarah Brady is a Personal Finance Writer and educator who's been helping people improve their financial wellness since 2013. Sarah writes for Experian, Investopedia and more, and she's been syndicated by Yahoo! News and MSN. She is a workshop facilitator and former consultant for the City of San Francisco's Affordable Home Buyer Programs, as well as a former Certified Housing & Credit Counselor (HUD, NFCC). Sarah can be contacted via


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