Settling Debt vs Paying in Full: Which is Better?
Posted on November 9, 2021 in Debt
In general, paying off your debt in full is a better option for your credit score than debt settlement, but settling debt can help you become debt free faster and at a lower cost. Read on to learn more about the pros and cons of settling debt vs paying in full, and to find out which option might be right for your personal finance situation.
For most individuals, being debt-free is an ideal way to live – and well, that’s the utopia-kind of life we want! In addition to increasing your savings, being debt-free relieves you from anxiety and increases your financial security.
If you already have a debt, the chances are that you’re looking for solutions to pay it off and avoid a creditor lawsuit. But paying your debt off is just one option of going debt-free. The other one would be to consider settling your unpaid debts.
Settling debt means that your creditor has accepted less money than you owed them. You may approach the debt relief firms to have your debt settled, or you may do it yourself.
So, is it better to pay off debt or settle it? This guide will compare paying off debt vs settling it and offer you the best strategy for managing your debts. Feel free to dive in!
Which is Better for Your Credit: Paying Your Debt Off or Settling it?
Before we look at which is better between settling debt or paying in full, let’s first look at credit score and how it relates to these two debt relief options. A credit score is a number that lies between 300-859, which shows the consumer’s creditworthiness. The higher the score, the better the loan terms you’ll receive and the easier an individual can get approved for new lines of credit.
Settling Credit Card Debt vs Paying in Full
In terms of the effect on your credit score, paying your debt vs settling will impact your good standing differently. In general, paying your debt off in full is a better option for your credit score. It sends a more positive signal to the lenders than having your debt listed as settled. And given that your payment history accounts for 35% of your credit score, having fewer negative marks like settled debts or late payments is better and will impact your credit score less.
If you opt to settle your debt, you’ll end up paying less money than you owe your creditor – but at the expense of your credit score. However, it’s important to note that the creditors may not be willing to negotiate the debt settlement until the account is significantly past due. This could mean 3 to 6 months of having defaulted before getting the option to settle your debt. If the creditor reports those late payments to the credit bureaus, then the damage to your credit score will be worse, which is another key factor when deciding if settling debt vs paying in full is better.
Also, late payments will remain on your credit history reports for up to 10 years, although their effect on your scores can fade over time. That means that your creditworthiness will be relatively poor and hinder your fico score for up to 10 years. If you’re concerned about settling credit card debt vs paying in full, you may also wish to read our full guide on how to settle credit card debt.
If you’re looking to pay less than the full debt amount, you can approach the creditor to negotiate settling terms. Debt relief firms can settle the debts on your behalf – for a fee.
Can I Pay to Have My Bad Debts Deleted From My Credit Report?
As you seek options to settle your past due debts, chances are that you’ll come across something like “pay to delete.” This involves paying lenders or collection agencies to have your negative credit information removed from your credit reports.
You write a pay to delete letter to the debt collector or creditor outlining your risk. If they agree to your requests, you pay a certain amount of money to scrap the negative credit information off your credit reports.
However, the pay to delete tactic isn’t always effective when pursuing settling debt vs paying in full. When the negative information is accurate, only time can do away with it. In this case, the pay to delete option may even be regarded as illegal, and the negative impact on your personal finance situation will need to be dealt with through different means.
Again, the negative information will stay on your credit report for up to 10 years. So, whether you settle your debt or pay it in full, you can’t simply make the negative marks on your account disappear.
Let’s look at some methods you may use to pay off your debt in full or settle it.
How to Start Paying Off Your Debt
If your debt isn’t already in collections, you have several options for paying it off. Begin by getting clear information about the amount you owe your creditors and the total amount you’ll pay for each loan. Once you have clear details, you may choose to clear the loan through either the debt avalanche method or the debt snowball method.
In the debt avalanche method, you focus on paying off the highest-interest debt first. It’s most effective when you want to reduce the hefty interest charges first. With the snowball method, you pay off the smallest debts first, and the rest follows. It’s mostly used by people that want to feel motivated to pay off their debts.
Another option when thinking about settling debt vs paying in full is that you may consider debt consolidation if you’re looking to simplify your debts and potentially minimize the interest rates. It involves combining multiple debt accounts into one to make a single set of monthly repayment.
Lastly, you may consider the balance transfer credit card if you qualify. This option allows you to consolidate your credit card debt into a single credit card loan and pay it off at a 0% interest rate.
If your debt is already in the collection, you may need several strategies to pay it off rather than pursuing a form of personal loans. You may begin by contacting your creditors and exploring your options. If you’ve been sued because of the debt, you may want to get a lawyer.
How Do I Settle My Debt?
If you’re looking to save some dollars, you may decide that debt settlement is worth it. Here, you approach your creditor to negotiate your debt. You may do it yourself or hire the services of one of the top debt settlement companies to have the debt settled on your behalf – at a fee.
If you decide to negotiate the debt yourself, you need to know how to strike the right bargain with your lenders. And since there is no set rule of thumb when it comes to determining the amount of debt you should repay, your negotiation skills can save you! Some creditors may not accept anything less than 85% or 75% of the full balance due, while others may accept as low as 50% or less of what’s owed.
Key Factors to Consider When Determining the Amount of Money to Offer For Settling Debt
- The amount of money you owe the creditors
- The last time you made a repayment
- The amount of money you can realistically afford to repay
The amount of money you can raise is especially important since debt settlement requirements demand that you make a lump sum payment. But some lenders may allow you to break it up into two to three payments, depending on your financial stability.
Once you’ve decided if settling debt vs paying in full is better, and you’re ready to make an offer, you can reach out to your lender in writing or by phone. Written communication is preferred as it helps leave a trail in case the creditor disputes the settlement terms later. Be ready to have a counter-offer from the creditor, but don’t be rushed into agreeing to an amount you can’t afford.
After you and your lender agree, get the final details in writing before making the payment. Get a written verification from the creditor after they receive the payment. The last step should be to check your credit reports to ensure the account has been updated.
If you don’t want to go through the hassle mentioned above, you may decide to hire a debt relief or settlement company to settle the debt on your behalf.
Important: Debt settlement may be an expensive option if the forgiven amount exceeds $600. If that’s the case, you’re required to pay income taxes for the forgiven amount.
Getting Extra Help With Debt Payment
Debt settlement vs paid in full can be overwhelming and daunting, especially if it’s your first time. Luckily, many resources exist to guide you through your debt settlement or payoff journey. A good place to begin is a non-profit credit counselor. These experts provide you with advice on managing money, changing financial habits, dealing with lenders, creating a budget, and creating a strategy to get out of debt.
If your credit counselor can bargain a reduction in the interest rate or fee waivers on your behalf, then you may end up saving a lot of money.
With credit counselors, you can receive a free initial consultation and get help managing your debts at a very affordable price. If your creditor has sued you, you may seek the help of a professional lawyer.
You may also engage with organizations that work with the populations you might be part of. This includes the Military OneSource, which represents military personnel and their families in lawsuits.
Is It Better to Pay Off Debt or Settle It?
In general, paying off your debt in full is a better option than debt settlement because it will not harm your credit score. Debt settlement, on the other hand, can help you get out of debt faster and at a lower cost by making a single lump sum payment.
Is there a difference between settled in full and paid in full?
You may have heard the terms paid in full or settled in full when it comes to loan debt. These terms, while related, are not interchangeable. Both refer to accounts that have been closed, indicating that the loan term has ended and the balance has been accounted for, but they have very different meanings and implications for your credit history.
You’ve paid off the entire balance and interest if you’ve paid in full, whereas settled in full means you’ve paid less than the entire loan amount, which usually has negative consequences.
Is it better to pay off debt or pay down debt?
When considering settling debt vs paying in full, our advice is to prioritize paying off large amounts of debt while making small contributions to your savings. After you’ve paid off your debt, you can begin to build your savings more aggressively by contributing the full amount you were previously paying toward debt each month.
Is it bad to settle a debt for less?
Settling an account rather than paying it in full is usually regarded negatively because the creditor agreed to accept less than what was owed in exchange for a loss. However, depending on your financial situation, it is not always a bad idea to settle a debt for less. Every year, debt settlement assists thousands of people in getting out of debt at a lower cost.
The Bottom Line on Settling Debt vs Paying In Full
When you have a big debt burden, figuring out whether to settle it or pay it in full may be confusing. You’ve to weigh your options and the repercussions in each. When overwhelmed by the debt, you may feel like you have limited options. But the truth is: you have a full range of options at your disposal ranging from a debt management plan to debt consolidation, debt settlement, as well as varying resources to help you with your decision.
This post outlines everything you need to know to make an informed decision regarding debt settlement vs paying it in full. Good luck as you work towards becoming debt free!
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