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How Much For How Long Would a Settlement Hurt My Credit Score? – Leanne

“Dear Steve,

I have credit card debt on one card of $18,000. They are willing to settle with me through their settlement dept. for $10,800. I am only making the minimum payments on this account. My credit score is in the 7 hundreds and I don’t want to do much damage because I would like to buy a house in the next 5 years. Advice? How much would a settlement hurt my credit score? And for how long?


I asked my friend Mike Killian to answer your question for you. I wanted to make sure you got an answer as quickly as possible as I’m a bit backed up at the moment. I’ll be watching the comments on this question and be around to help if you need me.


You are not alone. I'm here to help. There is no need to suffer in silence. We can get through this. Tomorrow can be better than today. Don't give up.

Dear Rita,

Hi Leanne,
I wish I had better news for you but if you are looking to keep your credit score high, debt negotiation is not the route you want. The only thing that will maintain a good credit score is on time payment history. A history of on time payment constitutes about 1/3 of your score.

Consider if you were the creditor and someone owed you $18,000. Why in the world would you ever settle for $10,800? There is only one reason. You as the creditor would have to believe that is the best you were going to do. Why would you think that? You might think that was the best you were going to do if the individual did not pay their monthly payment for 2-3 months and you felt they were going to declare bankruptcy.

That is exactly what the debt negotiator does. He/she convinces the creditor that $10,800 is the best they will get by withholding payments for 2-3 months. The creditor in turn reports non-payment to the credit bureau and there goes the credit score into the toilet. BTW that payment is usually a lump sum to the debt negotiator.

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There are a couple other issues debt negotiators do not heavily promote. The fact is, any debt forgiven above the amount of $600 has a “Misc 1099” issued against it. The IRS then taxes the individual for this amount as added income and you will have to pay tax on it. One other item they do not heavily publicize is that the debt can come back to you as unpaid. This does not happen often, but it could occur.

I would think twice about debt negotiation especially if your credit score is important. The only thing you can possibly do to rid yourself of that debt as easily as possible, is ask for a lower interest. Also do not hesitate to pay as much more on the minimum payment as possible.

You may be interested to know that a simple increase in minimum payment can dramatically reduce the total interest and time to pay off the debt. For example, if you have a $5000 debt at 17% interest and pay $100 per month you will pay $11,304 in interest over 40 years. That same interest and amount with a minimum payment of plus $25 will reduce the amount of time to pay off the debt and the amount of interest by nearly ½.

The very best to you and good luck



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About the author

Mike Killian

Mike Killian is founder of Learning Credit and Debt Management. He has been writing and teaching about credit and debt management issues for over 12 years. His articles have been referenced by various members of the media, including MSNBC and The Motley Fool. Mike has also offered debt elimination seminars to businesses and community colleges for many years. He has an MS in counseling and is a nationally certified as a Personal Finance Counselor. Mike can be found at

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