Settling an old debt may help your conscience, but it won’t do anything to fix your credit or boost your credit score. But many consumers seem to think otherwise. Many agree under pressure from debt collectors to settle old debts, without understanding the implications of their decisions.

The fortunate ones weigh the consequences, like this New York woman. “I just refinanced my apartment in order to pay off considerable credit card debt,” she explained. “The card companies are offering to accept settlements from me–less than what I owe–to satisfy my debts. They tell me they will notify the credit bureaus the accounts are settled.

“I’m concerned because I’ve heard that what I really want is to have the accounts reported as ‘paid as agreed,’ but the companies will not do this. So my bottom line question is this: if I settle with the companies for less than what I owe, how will this affect my credit score? Will it take longer for my credit score to improve if I settle my debts rather than pay them in full?”

Settling a debt for less than face value may seem like a bargain. However, Craig Watts, a spokesperson for Fair Isaac Corp., the company that developed the FICO credit score, cautions that it is not.

“FICO credit scores regard a ’settled’ account on a credit report as a seriously negative factor. The time it takes your score to recover always depends on two things: 1) what other information — good as well as bad — is on your credit report, and 2) how you handle your credit from that point on. Typically, credit scores improve slowly in response to a steady pattern of responsible credit management,” he explained.

When you settle a debt, you acknowledge you cannot live up to the original terms of your credit agreement or “pay as agreed.” It may be a quick fix, but it leaves you with a long-term problem of damaged credit. And rebuilding credit is like rebuilding lost trust: it takes time and effort. Unless a creditor is willing to state, in writing, that the account will be reported as “paid as agreed,” think carefully about settling for less than you owe.

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