The following is provided for informational purposes only and is not intended as legal advice or credit repair.
A reader once wrote in to ask about an offer she'd received from a collection agency. She was on the hook for $225, but the collection agency was willing to make her a deal: if she could pay $139 they'd consider the debt satisfied. The only catch? The debt would be considered "Paid Off Less than Full Balance" on her credit report.
So she wanted to know if it was worth it to take the deal, or if it was better to pay the debt in full. Here's what you need to know about the major differences and potential ramifications of paying off a debt in full or only paying off less than the full balance.
What Does "Paid in Full" on Your Credit Report Mean?
When you pay a debt in full, you've basically fulfilled the terms of your loan or credit account and paid back the lender the full amount promised. With a loan, this usually happens once you've made your final payment and reached a zero balance. With a credit card, you typically wouldn't consider the account "paid in full" unless it was also closed (after all, if it's open you can always just borrow more money against your credit limit).
When a loan or a closed credit account are paid in full they should be reported as such on all of your credit reports.
What Does "Less Than Full Balance" or "Settlement" on Your Credit Report Mean?
When talking about debt repayment, "less than full balance" just means that you've reached an agreement with the lender or collector to pay less than the amount owed. This is considered a form ofdebt settlementon your credit report.
Lenders may be motivated to offer this sort of a deal on a debt that's so far past due that it's been charged off, which means that they've already written it off as a loss. They're still entitled to the money, however, so they'll often take a percentage of what's owe, rather than nothing at all.
How Does "Less Than Full Balance" Impact Your Credit?
Most settled debts will be listed on your personal credit reports as either "paid off less than full balance" or "settled less than full balance." If you've paid the full amount owed, the account will likely be listed as "paid in full."
Most credit reporting agencies say that having an account listed as "paid off less than full balance" is more harmful (or less helpful) than an account being listed as "paid in full." While it's difficult to know exactly how negatively a settled account will impact your credit score over the years, it certainly makes sense that paying accounts in full would be better for your credit health.
It's important to keep in mind, however, that even if you pay less than the full balance, the account is considered to be paid off, which is much better than having an open debt lingering in collections. From a purely credit scoring perspective (and leaving aside all the various missed payments that got you there), paid in full is better than paid off less than full balance, which is itself better than not paying off the debt at all.
Should You Pay a Collection Debt in Full or Settle?
The best choice for you comes down to your means and your priorities. These questions may help guide your decision making:
- Can you afford to pay the debt in full? Do you sacrifice anything by committing financial resources to paying the full amount? You may want to be responsible and pay what's owed, but is that in your best interests?
- Is your credit score a priority right now? Repaying a debt in full – even a debt in collections – is beneficial for your credit score, but even the most damaged credit history can be improved over time. If your score is still in good standing, it may be worth it to pay in full. If your score is already poor, however, it may not be worth worrying about the potential credit impact.
- Will you be a borrower again soon? If you plan on borrowing money again in the near future, than paying the debt in full puts you in the best position with potential lenders.
Keep in mind that if you do ultimately decide to settle the debt for less than the full balance, the amount you didn't pay may be considered income, which you'll have to include when you file your taxes. The larger the forgiven debt, the bigger the potential impact, so you may want to factor that into your decision, as well.
If you're struggling with collection debts, a good first step is talking with a free credit counselor. Counseling is confidential and available online or over the phone 24/7.
FAQs
Most credit reporting agencies say that having an account listed as "paid off less than full balance" is more harmful (or less helpful) than an account being listed as "paid in full." While it's difficult to know exactly how negatively a settled account will impact your credit score over the years, it certainly makes ...
Is it better to settle debt for less or pay in full? ›
Is it better to settle debt or pay in full? Paying debt in full is almost always the better option when possible. Research debt payment strategies — debt consolidation could be a good option — and consider getting financial counseling.
How does settle for less than full affect credit? ›
Also, reaching a debt settlement often involves racking up delinquent payments that damage credit scores. And settling an account instead of paying it in full is seen as negative because the creditor agreed to take a loss in accepting less than what it was owed.
Does paid in full hurt your credit? ›
The bottom line
The lower your balances, the better your score — and a very low balance will keep your financial risks low. But the best way to maintain a high credit score is to pay your balances in full on time, every time.
What does legally paid in full for less than the full balance mean? ›
When talking about debt repayment, "less than full balance" just means that you've reached an agreement with the lender or collector to pay less than the amount owed. This is considered a form of debt settlement on your credit report.
Should I accept a settlement offer from a collection agency? ›
Debt settlement can give you some short-term financial relief, but it can also hurt your credit score and make it more difficult to obtain financing in the future. Debt settlement companies will ask you to discontinue payment to your creditors while they negotiate on your behalf.
What is the best way to pay off collections? ›
The best method of payment will prevent a debt collector from having access to your financial accounts. For that reason, a money order is your best option. Be sure to keep a carbon copy and receipt.
Why do debt collectors settle for less? ›
Believe it or not, though, it's possible to negotiate with a collection agent and end up paying less than you owe. Why is that? Because the collection agency who bought the original debt from your creditor most likely did so for a tiny fraction of the original amount.
Will my credit score go up if I pay off collections? ›
For some credit scoring models, paying off collection accounts may improve credit scores. FICO® Score 9, FICO Score 10, VantageScore® 3.0 and VantageScore 4.0 credit scoring models penalize unpaid collection accounts. Paying off collection accounts may help improve these scores.
How long does it take to rebuild credit after debt settlement? ›
There is a high probability that you will be affected for a couple of months or even years after settling your debts. However, a debt settlement does not mean that your life needs to stop. You can begin rebuilding your credit score little by little. Your credit score will usually take between 6-24 months to improve.
It can take weeks or even days for you to notice a change in your credit score. If you have recently paid off a debt, wait for at least 30 to 45 days to see your credit score go up. Will it be beneficial for my credit score if I pay off a debt? Your payment history will not be removed after you pay off a debt.
Can I still use my credit card after debt settlement? ›
While you can still use your open credit card accounts after debt consolidation, consumers should do so with caution. If you do use your credit card after debt consolidation, be sure to pay off your balance regularly.
Do credit card companies hate when you pay in full? ›
While the term “deadbeat” generally carries a negative connotation, when it comes to the credit card industry, you should consider it a compliment. Card issuers refer to customers as deadbeats if they pay off their balance in full each month, avoiding interest charges and fees on their accounts.
Is it bad to max out a credit card and pay it off immediately? ›
Under normal economic circ*mstances, when you can afford it and have enough disposable income to exceed your basic expenses, you should pay off your maxed-out card as soon as possible. That's because when you charge up to your credit limit, your credit utilization rate, or your debt-to-credit ratio, increases.
Why did my credit score go down after paying off my car? ›
Lenders like to see a mix of both installment loans and revolving credit on your credit portfolio. So if you pay off a car loan and don't have any other installment loans, you might actually see that your credit score dropped because you now have only revolving debt.
What does balance paid in full mean? ›
Paid in Full Definition
If you have an outstanding debt, one option is to pay off the full amount so your credit report no longer shows it as being due. This is an option even if it's late or in collections.
What is the difference between paid and paid in full? ›
"Paid," or "paid in full," is the term applied to installment accounts, like car loans, after the last payment is made and you have completed repayment of the loan as agreed. Since you can't use the account for anything else, once a loan is paid in full, it is essentially closed.
What does it mean to pay your balance in full? ›
Pay your statement balance in full to avoid interest charges
But in order to avoid interest charges, you'll need to pay your statement balance in full. If you pay less than the statement balance, your account will still be in good standing, but you will incur interest charges.
What happens if a charge-off is paid in full? ›
Once you have paid off the entire amount, you can ask the credit bureaus to change the account status to: paid in full, balance zero. The account will still show that it was charged-off for seven years, but your credit score will improve and future lenders will look more favorably at your status.
