Settled in full vs. paid in full

What does it mean to settle a debt?

When you settle a debt, your creditor agrees to accept a payment that is less than the full amount you owe and cancels the remaining balance. Typically, you will negotiate a payment plan or payoff amount with your creditor, and once you have completed paying the agreed-upon amount, the account is considered settled in full.

This process is known as debt settlement, and it’s usually a last resort for borrowers who are behind on payments or can’t afford to pay off the debts owed. You can try to negotiate with your creditors directly or work with a debt settlement company to help settle on your behalf.

What does it mean to pay a debt in full?

When you pay a debt in full, you pay the entire amount you owe, which includes the original loan plus any interest and fees. When you pay off a credit card, auto loan or mortgage, your creditor reports the account as paid in full to the major credit bureaus.

But just making the statement balance payments on your credit card or keeping up on your monthly car payments doesn’t mean your debt is paid in full. These are considered on-time payments to creditors, but a debt is only paid in full when the entire amount you owe is completely paid off.

Impact on credit reports and future lending

Whether your debt is settled or paid in full, the resolution gets reported to the major credit bureaus, which affects your ability to borrow in the future.

Paying in full is generally better for your credit score. It can improve your credit utilization ratio, boost your debt-to-income ratio and show lenders a positive repayment history. These factors can make it easier to qualify for credit cards, auto loans or a mortgage.

» MORE: How long does it take for my credit score to go up after paying off debt?

Settling a debt is still better than leaving it unpaid, but it usually lowers your credit score. When an account is marked as settled in full, it shows you didn’t repay the full amount owed. This status can stay on your credit report for up to seven years and may make lenders less willing to extend credit. In some cases, lenders that review your full credit report during underwriting may deny the loan if they see settled debts.

Strategic advice for managing debt

When it comes to managing debt, it’s almost always a good idea to pay your debts in full. This helps protect your credit score, avoids unnecessary fees and stops collection calls for past-due payments.

But if you’re falling behind on your debts and considering debt settlement, there may be better options that avoid hurting your credit score.

• Credit counseling: Credit counseling agencies are nonprofit organizations that can help you manage your credit card debt or other debts you have difficulty paying. Credit counselors help you create a budget and figure out what you can afford to pay using a debt management plan. You’ll pay the credit counseling agency a monthly payment, and the agency distributes your funds to your creditors for an agreed-upon amount.
• Debt consolidation: If you have too much high-interest debt, you might want to consider a debt consolidation loan. This is a personal loan that can be used to pay off several debts at once, effectively consolidating your debts into a single monthly payment.

  Debt consolidation can lower your interest rates and monthly payments, which can save you money and make it easier to avoid missing payments that could hurt your credit score.

• Balance transfer cards: If you have multiple credit cards with balances you can’t quite afford, you may be able to transfer those balances to a balance transfer credit card with 0% interest. These cards usually offer an introductory 0% interest rate for up to 15 months, which can help you save on interest and pay down your debts faster.
• Hardship plans: Some creditors offer hardship plans that allow you to lower your monthly payment and extend your repayment terms without hurting your credit score. These plans are usually temporary but can be a good idea to help you if you lose your job or suddenly can’t afford your regular payments.

» COMPARE: Best Debt Consolidation Companies

Is settling debt ever worth it?

Settling is rarely worth it. For most borrowers, it’s best to pay off your debts completely so they are paid in full. This protects your credit score and allows you to continue borrowing money in the future for things like purchasing a car or a home. But if you truly can’t afford your payments, settling is a better option than defaulting.

» MORE: Debt settlement pros and cons