How does settling debts for less than the full amount affect your credit?

Answer

If the debt is already in collections it is really behind..it is not going to hurt. That information stays on there for 7 years anyway. Better to have paid something rather than "0"....and you can get them to put settled but satisfied...request it in writing when you get the settlement.

Opinion #2 from "Bill Collector":

Typically, it is better to settle an account than to let it remain unpaid - most of the time. There are some considerations to view...

If the debt is several years old already and your creditor is NOT planning to sue you, you may just want to let it ride until it falls off of your Credit Bureau Report (CBR). The last time you do anything related to a debt (like make a payment, settle or pay in full) you re-start the 7.5 year CBR clock.

To your question - when you settle an account your credit report will reflect "Legally settled for less than the full balance" under the appropriate tradeline. A settlement tells every risk manager that looks at your credit report for the next 7.5 years one very important thing: you are a person that borrows money BUT you don't pay it all back. That makes you a MUCH higher risk than someone who pays their balances in full. You may not be turned down for credit in the future, but face the fact that because you are a demonstrated risk (you don't fulfill your promises to pay all of what you owe) you will probably not be considered for the more favorable interest rates available.

If the account is with the original creditor who reports your payment history to the Credit Rporting Agencies you may derive some "consideration" in the way they report your settlement. If the debt has moved to a collection agency you will have less negotiating room because they are typically NOT subscribers and do NOT report payment history. They just want your money and employ interestiing tactics to achieve their goal. (If you can read between the lines you should sense that your financial stress went up).

If you want to know how to handle a bill collector, let me know.

It's your call. Do what you can live with.