Dealing with debt may be a challenging and perplexing process, particularly if you’re finding it difficult to pay it off. You might be unsure of how to proceed if you wind yourself with a bill that is past due or, worse, in collections.
It’s possible that you’ve come across the phrases “settled in full” and “paid in full.” According to Colton Castleman, a retirement counsellor at Strong Foundation Retirement Counsellors in North Carolina, “Both options will close the account with a balance of $0 owed.” But their respective impacts on your credit score are different.
Learn below which is better for your finances in the long run: having a settlement appear on your credit record or having a debt completely paid off.
Full Payment Definition
The creditor will notify the credit bureaus when you pay or fail to pay your debts on your credit accounts. After that, the agencies will update your credit record to reflect the most recent account status.
One choice if you have an unpaid bill is to pay it off completely so that it is removed from your credit record. Even if it’s past due or in collections, this is a possibility. Your credit record will reflect that this account was paid in full if you decide to pay the bill off.
the significance. Paid in full denotes the repayment of both the principle amount plus any applicable interest. You are no longer required to make payments at this time.
the impact on your credit. Your greatest bet for improving your credit score is to have a debt that has been fully repaid. “Paid in full will have a positive effect on your credit score, and even more so if all payments were made on time,” said Castleman. This is due to the fact that, of all the variables considered in determining your credit score, payment history accounts for 35% of the total. Your account would be regarded as fully paid and in good standing in this scenario.
Settled in Full Definition
Another choice is to pursue debt settlement if you are unable to pay off a debt entirely. Your account will be regarded by your creditor and the credit agencies as fully settled – or occasionally “paid-settled” – if you actually go through the settlement process and finish the agreed-upon payments. On your report, it will be stated accordingly.
the significance. According to Andrew Latham, a certified financial advisor and the director of content at SuperMoney.com, a debt that has been “settled in full” is actually one that has only had a portion of the outstanding total paid. In other words, it indicates that your debts were not fully repaid.
Debt settlement entails coming to an arrangement with your creditor or debt collector where you pay less than you presently owe but the obligation is still seen as paid. Creditors often only consent to debt settlements if you are considerably behind on payments and it is unlikely that they will be reimbursed in full. Either you or a corporation that you employ can negotiate a debt settlement on your behalf. Once the loan is repaid, it will appear on your credit reports as fully settled.
the impact on your credit. A “settled in full” status on your credit record is not ideal, but it’s better than “unpaid” or “in default,” according to Latham. Your credit score will be affected if you settle an account rather than paying it off completely and on time, which indicates that you’re a risky borrower. Additionally, dealing with a debt settlement firm frequently entails stopping your creditor payments in order to increase your negotiating power. As a result, you have a history of missed payments over several months, which might harm your credit in the months prior to the settlement.
There is no way to predict how much your credit score will decrease if you have a “settled” status on your report because there are so many distinct factors that might effect it. But it will undoubtedly be diminished. The good news is that while a resolved debt will continue to appear on your credit record for seven years, it will gradually have less of an impact on your credit score.
Which Is Better: Payment in Full or Settlement on Credit Report?
The ideal course of action is timely and complete debt repayment. If you have the means, paying in whole is usually preferable, according to Latham. Your credit score is raised when a debt in your credit history is fully paid off. Additionally, if you didn’t miss any payments, your account is seen as being in good standing, which stays on your record for up to 10 years instead of seven, as opposed to delinquencies.
Of course, things happen, so you might not always be able to make your payments on time. Perhaps you needed to use credit cards or loans to get by because of a medical emergency or a job loss. Maybe along the line you forgot to make some of your payments. You are still better off paying off the bill in full even if you are behind.
In that case, Castleman advises that you should first try to renegotiate the loan’s terms with the lender. You might be able to come to an agreement on a modified repayment plan, for example, that lengthens the loan term while reducing the monthly amount. “You can also discuss forbearance with them to delay or reduce the payments for a while,” he says.
Debt settlement can be your best alternative, though, if none of these are a possibility. It is preferable to have a debt fully cleared than to keep struggling and keep skipping payments, further damaging your credit score.
Reducing the total amount of unpaid debt you still owe is another advantage of debt settlement. The amount of debt you have relative to the overall amount of credit provided to you will assist determine your credit score because lenders want to know that you aren’t unduly dependant on borrowed money. In actuality, “amounts owed” makes up 30% of your credit score, making it the second-heaviest weighted element. Your credit utilisation decreases when you pay off a debt, even if it’s through a settlement.
If you experience one of these warning signs from Latham, you may want to think about debt settlement:
- You are ineligible to obtain a loan for debt consolidation.
- More than half of your annual salary is in your balance.
- Within five years, you can’t afford to pay it off.
In rare circumstances, it can be permissible to request that your creditor declare a settled debt as fully paid. The creditor is under no responsibility to negotiate on your behalf, thus you will need to do so. However, you can avoid having that adverse note on your credit report and accompanying blow to your credit score if your debt is represented as paid in full rather than resolved in full. If your creditor agrees, make sure to receive a written confirmation from them along with the date the account will be marked as fully paid and reported to the credit bureaus.