What Is the Difference Between Paying a Credit Card in Full and Settling the Balance?

By Zakiya Lathan

  • Overview

    Clearing away debt is clearing away debt, right? If you are offered the option to settle your debt for a lesser amount than previously owed, it's the same as if you'd paid the credit card in full, right? Wrong. Settling your credit card balance versus paying your credit card bill in full is viewed very differently in the financial industry. Sure, settling your debt will keep bill collectors from hounding you, but it may also adversely impact your credit rating. As a general rule, those who pay their credit card bills in full are regarded as responsible, while those who settle are not seen as such.
  • Pay the Credit Card in Full or Settle the Balance?

    Pay your credit card bill in full, if at all possible. This action only helps your credit score. It also shows future lenders that you are able to successfully manage your debt and pay your bills as agreed.
  • Not Paid as Agreed

    "Agreeing to settle for less than the full amount on accounts may be regarded negatively by the FICO scoring model," according to a Fair Isaac Corporation website, myfico.com. If you can't pay your credit card in full, because of the potentially negative impact that a settled debt can have on your credit score, you may want to ask for an agreement that specifies exactly what notation will be placed in your credit report after you pay the settlement amount. Since a settlement is a renegotiation of the agreed amount that you owe, ask that the notation "Paid as Agreed" or "Current" be applied to your report. There are no guarantees, but if you don't ask, you most likely won't get the more favorable notations. A less-than-favorable notation may mean a less-than-favorable FICO score.


  • FICO Scores

    The three major credit reporting agencies--Equifax, TransUnion and Experian--maintain separate credit files. Each credit report is used to calculate separate FICO scores for individuals based on the proprietary algorithm developed by the Fair Isaac Corporation. Since each agency works independently and bases its scores on its own records, the three FICO scores are usually similar but not the same. Any one individual may have three different FICO scores.
  • How FICO Scores Are Calculated

    FICO scores are based on your credit information in five general categories, according to the Fair Isaac Corporation. Thirty-five percent of your score is based on payment history, 30 percent is based on amounts owed, 15 percent is based on length of credit history, 10 percent is based on new credit and 10 percent is based on types of credit used.
  • Beware of Potential Taxable Event

    If part of your debt is forgiven, the IRS may view this as income and therefore a taxable event. Be certain to check with a tax specialist before your federal income tax is due. Uncle Sam is one creditor that you definitely don't want to be past due on.
  • Caveat

    As with any financial advice, be certain to contact a financial professional about your individual financial questions. This article is meant only as general information on the subject and might not adequately answer all of your specific financial concerns.
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