Hi friends I'm Laura Adams and you're listening to the Money Girl Podcast. Podcast.

Many people are tempted to settle an old debt for less than they owe,

but they're unsure about how it would affect their credit.

Deanna asks, I don't have a huge amount of debt,

but it's killing my credit score and I want to get rid of it.

Is it better to pay an old credit card debt in full or to settle it for less?

Debt settlement is the process of making a large one-time payment toward a debt in exchange for

having the balance of the debt forgiven. For instance, let's say that Deanna has

$6,000 in credit card debt and she hasn't been able to make minimum payments for many months.

The credit card company may approach Deanna or she could contact them about settling the debt for $3,000 and cancelling the remaining

3,000.

How much you can settle a debt for is always negotiable and the higher your balance the bigger the discount you're likely to receive on a percentage basis.

Settlement is typically an option for unsecured debts like credit cards and medical bills that are not backed by collateral

that could be seized by the creditor and sold to pay off the debt, as is the case with

a car or home loan. In general, an unsecured creditor would

rather get a smaller upfront payment than risk getting no payments on the account. If you have a lump sum of cash to make a debt settlement,

paying less than you owe may sound like a dream come true. However, there are drawbacks to be aware of.

The first downside to settling debt is that it shows up on your credit report.

Anytime you pay less than you borrowed, including interest, you damage your credit history and credit

scores.

Negative information, like late payments or a settlement, remain in your credit file for up to

seven years from the original delinquency date.

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