What's better for your credit score: paying what you owe or settling the debt

Dear NCY,

I think you already know what my answer will be and that it will confirm what you already know.

When you get a loan or credit card, you sign a contract that says you are legally responsible for the amount you borrow and that you will repay the total amount plus any interest or fees. When you do not repay the entire amount as agreed, you are breaking the contract.

Put yourself in the lender’s shoes. If someone borrowed money from you, would you rather they pay back all of the money they borrowed, or only 60 percent of it?  They can likely sell the account to a collection agency and charge off the uncollected amount for a tax break, so they don’t necessarily benefit from settling with you.

You might try to negotiate a settlement if the account already has been placed with a collection agency. They need to recover their investment and you need to get this bad debt behind you and move on.

Whether settled with the creditor or with a collection agency, your credit report will reflect that you did not pay the total amount and that will hurt your credit scores for seven years.

But remember, a bad credit score won’t affect you in any way if you just focus on paying down your existing debt and saving for a rainy day.  When you have all of that in control, then you can think about how your credit score might affect your future purchases.

Thanks for asking.