Does Debt Settlement Affect Your Credit Score?

By Kat Tretina MONEY RESEARCH COLLECTIVE

Updated March 27, 2026 1:25 PM

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If you’re drowning in debt and feel like you can’t make any progress, debt settlement — a process that could allow you to settle your debt for a fraction of what you currently owe — might be a good option to consider. In a 2023 economic impact report commissioned by the Association for Consumer Debt Relief (ACDR), researchers estimated that member companies cleared about 1,242,200 accounts in 2022, with $5.6 billion in principal value and $2.8 billion in settlement value (the average settlement was about $2,300 on an average enrolled debt of over $4,500).

However, there is a catch to debt settlement: People who enroll in these programs can see a substantial impact on their credit, making it more difficult to qualify for additional credit or get approved for an apartment. The Consumer Financial Protection Bureau also warns that many debt relief companies encourage consumers to stop paying creditors during negotiations, which can trigger late fees, penalty interest, more aggressive collections — and even lawsuits.

Depending on your situation, debt settlement (which is also called debt relief) could still be worth the risk. But it’s critical to understand how it could affect your credit before you pursue it.

How does debt settlement affect your credit score?

Debt settlement may be an option if you have unsecured debts, such as credit card debt or outstanding personal loans, that are delinquent or in default. If you choose to work with a debt relief or debt settlement company, they will negotiate with your creditors to settle your debt for a smaller amount.

Because creditors don’t have an incentive to settle accounts that are up to date, the debt settlement process often involves skipping your payments during the negotiation process. And missed payments can damage your credit.

Depending on your credit history, the number of accounts that are behind and how many payments you’ve missed, you could see your credit score drop substantially — especially if you started with good credit. In addition to the initial credit score drop, delinquent accounts remain on your credit report for seven years in many cases, generally counted from the date the account first became delinquent and was never brought current again.

Having missed payments or a history of debt ending up in collections on your credit report can make creditors wary of issuing you credit. It can take time to rebuild your credit and, in the meantime, qualifying for a mortgage, loan or credit card can be challenging.

How a settled debt can appear on your credit report

Debt settlement can affect your credit in more than one way, depending on what happens before the account is settled. For example, you may see:

Late payments, which can remain on your credit report for up to seven years
A charge-off if the creditor writes the debt off as a loss
A collection account if the debt is sent or sold to collections
A remark that the account was “settled” or “settled for less than the full balance,” which can signal higher risk to future lenders

Even if a settlement helps you get out of debt faster, those negative marks can weigh on your score until they age off your report.

What happens to your credit score after debt settlement is complete?

The impact of debt settlement on credit scores might give you pause. However, it’s important to keep a few things in mind:

It may be the lesser of evils: If you’re contemplating debt settlement, you’re likely in a tough financial situation already. You may have already fallen behind on your payments, are at risk of missing payments or may be considering bankruptcy. In these cases, getting out of debt is likely a more pressing concern than protecting your credit score, and reputable debt relief providers generally aren’t allowed to charge upfront fees for covered services — meaning you may not have to pay before a debt is actually resolved.
It’s temporary: Debt settlement can take two to four years.But even as you go through the debt settlement process, the initial missed payments that trigger negative marks on your credit reports keep getting older, which over time, means they factor less severely in your credit score calculation.

One practical first step: check your credit reports regularly (you can typically get free weekly reports from the three major bureaus at AnnualCreditReport.com) so you can monitor progress and dispute any errors.

Weighing the benefits of debt settlement against the drawbacks

Before deciding to move forward with debt settlement, carefully consider the pros and cons:

Pros

You could eliminate your debt sooner: Depending on your total debt and interest rates, it could take you years to repay your debt on your own. By entering into a debt settlement agreement, you could slash your debt and eliminate your balances sooner, freeing you to pursue your other financial goals.
You may settle your debt for less: Debt settlement could drastically reduce how much you have to repay. In the ACDR-commissioned 2023 report, the average enrolled debt was over $4,500 and the average settlement was about $2,300 — roughly a 50% reduction before accounting for fees.

Cons

Significant impact on your credit: Becoming delinquent on your accounts can reduce your credit score by 100 points or more.
Potentially high fees: If the debt relief company can successfully negotiate a settlement and you approve the settlement, they will charge you a percentage of your enrolled debt. Depending on the company, it can be as much as 25% of your enrolled debt.
Discharged amount is taxable as income: If you settle your debt for less than you owe, the discharged amount can be taxable as income, so you may need to prepare for a larger-than-normal tax bill.

Managing Your Debt

While debt settlement does affect your credit, for those who are already behind on their payments and struggling to manage their finances, it could provide invaluable relief. If successful, you could settle your debt for much less than you owe, and you could get out of debt faster.

If you’re considering debt settlement, make sure you’ve also looked into other options, including do-it-yourself approaches like the debt snowball or debt avalanche methods and meeting with a nonprofit credit counselor. You may also want to ask creditors about hardship programs or workout plans before you stop paying, since missed payments can quickly compound the damage.

If you decide that debt settlement is a good alternative to bankruptcy or other options, look for a debt relief company with a stellar track record and reputation. The best debt settlement companies have comprehensive customer support to guide you through the process.

This story was originally published March 28, 2025 at 10:04 AM.