What is the difference between settled in full and paid in full

Because strong credit scores are designed to reward those accounts that have been paid on time according to the original credit agreement before they're closed. A debt settlement plan—in which you agree to pay back a portion of your outstanding debt—modifies or negates the original credit agreement.

When the lender closes the account due to a modification to the original contract as it often does, after the settlement's complete , your score gets dinged. Other lenders are likely to take notice and be warier about granting credit to you in the future, too. Still, it is possible that the reduced debt burden is worth a subsequent drop in your credit score. The high credit card account balances and late or missed payments have likely already lowered it somewhat.

If debt settlement jump-starts your path toward a sounder financial future, it should be considered. Let's examine the process in more detail. As you know, your credit report is a snapshot of your financial past and present. It displays the history of each of your accounts and loans, including the original terms of the loan agreement, the size of your outstanding balance compared with your credit limit, and whether payments were timely or skipped.

Each late payment is recorded. You can negotiate a debt settlement arrangement directly with your lender or seek the help of a debt settlement company. Through either route, you make an agreement to pay back just a portion of the outstanding debt. If the lender agrees, your debt is reported to the credit bureaus as "paid-settled. While this is better for your report than a charge-off —it may even have a slightly positive impact if it erases severe delinquency —it does not bear the same meaning as a rating that indicates that the debt was "paid as agreed.

The best-case scenario is to negotiate with your creditor ahead of time to have the account reported as "paid in full" even if that's not the case. This does not hurt your credit score as much. Since most creditors are unwilling to settle debts that are current and serviced with timely payments, you're better off trying to work out a deal for older, seriously past-due debt, perhaps something that's already been turned over to a collections department.

It sounds counter-intuitive, but generally, your credit score drops less as you become more delinquent in your payments. However, bear in mind that, if you have an outstanding debt that was sent to collectors more than three years ago, paying it off through a debt settlement could reactivate the debt and cause it to show as a current collection.

Be sure to get this straight with your creditor before finalizing any agreement. A debt settlement remains on your credit report for seven years. As with all debts, larger balances have a proportionately larger impact on your credit score. If you are settling small accounts—particularly if you are current on other, bigger loans —then the impact of a debt settlement may be negligible.

However, paying something to settle the account could improve your overall creditworthiness and might improve your score a little. First, you lower your outstanding debt balance — 30 percent of your credit score. Second, lowering your debt balance improves your debt-to-income ratio.

Lenders usually care just as much about your monthly debt payments as they do about your score, because you must be able to afford a loan for the risk to make financial sense for the creditor.

If you have accounts you hope to settle, try asking for a deletion of the account. You can ask for this before or after negotiations, but not after sending the creditor money. Once you cut a check, you lose all power in the negotiation.

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