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Updated: May 08, 2023

Is It Better to Settle Credit Card Debt or Repay the Full Amount?

When offered to settle your credit card debt, compared it to repaying the balance in full -- considering the effect on your credit score.
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“Settlements” are often presented as attractive, favorable options to resolve problems.

Marriage settlements, class action settlements, structured settlements are types of financial settlements may offer tax advantages, saving you litigation costs and providing immediate relief.

However, when it comes to personal debt, and more specifically, credit card debt, is a settlement really the best option?

If you have credit card debt that is in default or has been sent to collections, you may be wondering, is it better to settle for a portion of the original debt, or should you make every effort to pay in full, if possible. This is a very common question.

Debt settlement is a very serious financial step that may impact your future for years to come. Along with any fees you pay for the settlement, the bigger price you will pay will be the impact on your credit score, after the debt is settled and the debt is reported.

Although settling credit card debt is not the same as filing bankruptcy, settling your credit card debt may affect your credit score almost as much as filing bankruptcy.

You may also have tax liability, as the “forgiven” amount of debt is considered income to the IRS, meaning you may have to pay taxes on it, unless you can prove you are insolvent.

What is Debt Settlement?

You may hear radio ads, or receive mailers offering debt settlement.

Companies with names that include words like “freedom”, “relief”, “help” and “solutions” offer positive futures and elimination of debt.

If you default on your credit card, you may settle the debt with the credit card company or a secondary debt collector that has taken over your account.

The main advantage to debt settlement is simply, you pay less than you owe, and you don’t have to file for bankruptcy. This provides you with a fresh start, and reduced or eliminated balances.

If you are behind in credit card payments and seriously considering a debt settlement, you need to seriously weigh the pros and cons and consider if the benefits (elimination of debt) are greater than the drawbacks and risks (serious credit damage and potentially burdensome tax consequences).

Typically, debt settlement is not an option if you are continuing to make payments on your bills.

Creditors may consider a settlement once you have defaulted and they believe they may receive no repayment. If you are still current on payments, you should repay your debt in full and protect your credit.

The elimination of debt is not better than the damage that your credit score will suffer.

Be very careful about following any “advice” from debt settlement companies to purposely or strategically fall behind on payments so that creditors will be willing to negotiate a settlement.

This will mean additional missed payments that will stay on your credit report for seven years.

Repaying Your Debt in Full

Paying your debt in full will honor the terms of your agreement with your creditor.

If you are not behind on your payments, you should make every effort to repay your debt in full.

You can consolidate with a personal loan or cut up your credit cards and use the snowball method of debt elimination.

You can also negotiate lower interest rates and time to pay.

Debt consolidation and debt negotiation, which lessen the burdens of monthly payments and may provide more time to pay down your debt, are not the same as debt settlement, which eliminates a portion of your principal debt.

If you are in default and have a large amount of debt, and already have seen your credit score plummet, it may be worth considering debt settlement.

You should speak with a credit counselor (member of the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling) to see if you may qualify for a debt management plan, depending on your income.

If you do not qualify for a debt management plan, talk to an attorney.

A lawyer can help you negotiate the most favorable terms of a settlement and how your creditors report the settlement to credit bureaus.

Debt Settlement Effects on Credit

Your credit score is determined by five factors: your payment history, your length of credit history, how much you owe, your mix of credit types and how much new credit you have.

Unfortunately, credit bureaus don’t give specific details on how much specific financial actions affect your credit score.

However, we do know that when debt is settled, the creditor will report the debt as “settled” or “paid settled.” Although this is a better scenario than “unpaid”, it will still hurt your credit score.

Typically, the higher your credit score is before you settle your debt, the more your score will drop.

If you are able to pay the debt in full, your credit score will be higher than if you settle it with the creditor or debt collection company.

If you have multiple accounts to settle, each account will be reported individually, resulting in multiple negative marks on your credit report.

Other Options

If you are not in default, look for all other options to avoid settling your debt.

If you think you can improve your financial situation in a few months, look for short-term solutions either with your creditor or via temporary help from loved ones, to meet the obligations of your credit card and avoid having to settle your debt.

Some options to consider:


If you lose your job or are facing financial hardship, and it is likely that you’ll miss a payment, you should call your credit card company.

Historically, creditors appreciate the communication and are willing to work with people who communicate early.

It is possible that they will let you miss a payment, or offer an interest-only payment plan to give you a little more time.

Consolidation with a personal loan

If you are able to make regular payments, but struggling with high balances, a personal loan may pay off your debts immediately and provide you with lower payments and more time to pay off your obligations.

If you are already in default, you may not qualify for a personal loan, or the interest rate offered may be very high. It is better to be proactive and consolidate before defaulting on payments.

Debt settlement should always be a last resort, final option. If you’re already deep in default and the damage to your credit score is done, there may be a little additional penalty to your credit score to settle your debt.

In other words, if your credit score is already very low, you may benefit from settling your debt and moving forward.

It will be some time before you can qualify for a mortgage or major loan, but you can focus on staying out of debt and slowly rebuilding your credit.

Financial Tips to Remember

Get any agreements in writing

If your creditors agree to terms of settling, reducing or restructuring your debt, have them provide the terms of the agreement in writing before you make a payment.

Do not rely on a friendly customer service agent’s assurances. If the creditor doesn’t honor the agreement, having a written agreement will protect you.

You may also need your agreement if you need to make corrections to or dispute your credit report.

Stay on top of your finances

Set up account alerts and calendar your due dates, especially credit card and loan accounts (mortgages, student loans, auto loans).

Consider setting up auto payments to at least cover the minimum due on credit card accounts.

Check your balances and payments regularly to avoid errors from spiraling accounts into default status.

Work with creditors to improve your report

You may be able to “pay for delete” certain types of debt, once you’ve paid it off.

Contract the creditor, or collection agency and see if they may be willing to work with you.

Look for other ways to save

Going forward, cutting down on spending can help you improve your financial future.

You may be able to save money by reducing your eating out spending, conserving power to lower your electric and heating bills, and getting rid of cable.

Take a good look at your monthly subscriptions and cancel anything that you do not need.

Look for other ways to earn

If you need more money every month than you currently have coming in, consider looking for a better job, or asking for a raise at your current job (note that you should never state your own financial need as a reason for asking for a pay increase).

Look for freelance or “side-hustle” contract jobs, such as driving for a rideshare company, freelance writing, tutoring, pet sitting or babysitting.

Conclusion: Keep a Positive Outlook

Remember, with better financial choices, your credit score will improve over time.

Even with fair credit, you can still buy a home, borrow money, start a business and get a job.

If you must settle a debt or declare bankruptcy, it may take some time, but you will have opportunities to rebound.

Take responsibility for your choices and your future, and live your best financial life!