Does debt settlement affect your credit score? Yes, but you may be interested in how it does, because it’s not as obvious as you may think. With debt settlement, you pay a portion of what you owe instead of the full amount that you owe.
It’s normal for your credit to take a hit after you settle a debt, because you have not paid in full. However, choosing to take this route after you’ve already defaulted on your credit cards means that you won’t likely take much more of a beating to your credit score, so it’s better to eliminate the debt than to sit on it.
If your accounts are current, don’t settle your debts for less than you owe unless you understand that your credit score is going to drop dramatically. That can make it harder to get credit in the future, and it could result in higher interest rates when you do. When you’re current on your payments, you’re less likely to be able to settle for a lesser amount, because the credit lender still sees you making payments for the full debt on time.
If you stop making any payments to your creditors, prepare to see your credit score drop quickly. The information about your past-due payments will be sent to your credit bureau, which then shows you haven’t paid to anyone else who wants to issue you credit. Even after paying off these debts, your accounts will be marked as paid, not as paid as agreed, so potential lenders will be able to see that you hadn’t made your payments on time.
Source: CreditCards.com, “How debt settlement works, how it affects credit scores,” Todd Ossenfort, accessed Aug. 06, 2015