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 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."
What does "paid in full for less than the full balance" mean? ›
When you work with your creditor to demonstrate hardship (such as loss of job or extended medical leave), they may be willing to develop a settlement agreement. Settlement agreements allow you to pay less than the full balance against the card, but will close the account after that agreed payment has been made.
What is the difference between charge-off and paid in full? ›
The Implication of Paying Charge-offs in Full
It doesn't remove the charge-off from your credit report but changes the status to “Paid” or “Paid in full.” This is important because it shows future lenders that you eventually took responsibility and paid off your debt.
Is it better to pay off collections in full or settle? ›
The bottom line
So, if you've fallen behind on payments, it's crucial to address the situation head-on as soon as possible. In general, paying off your credit card debt in full is the optimal solution that preserves your credit score and history.
Does paying less than full balance affect credit score? ›
In exchange for a lump sum payment, the creditor agrees to mark the account as "settled" or "paid in full for less than the full balance." This notation on your credit report indicates that you did not fulfill the original terms of the agreement, which can temporarily lower your credit score.
Does paid in full hurt your credit? ›
If you regularly use your credit card to make purchases but repay it in full, your credit score will most likely be better than if you carry the balance month to month. Your credit utilization ratio is another important factor that affects your credit score.
What happens if mortgage is settled for less than full balance? ›
Although it may be less detrimental than a foreclosure, a mortgage loan that shows "account paid in full for less than full balance" or "settled" will likely have a substantially negative impact on your scores because it means that you did not repay the debt in full as agreed.
Does a charge-off mean I still owe? ›
A charge-off doesn't absolve you of the debt you owe. You are still legally responsible for the unpaid debt, and it will take time for your credit score to fully bounce back from a charged-off account. However, addressing a charge-off as quickly as possible can help lessen the impact on your credit score in the future.
Is a charge-off worse than a repossession? ›
Is a charge-off better than a repossession? While you might get to keep your vehicle if your auto loan is charged off, both charge-offs and repossessions negatively affect your credit history and could impact your ability to qualify for a loan in the future.
What is a good credit score? ›
There are some differences around how the various data elements on a credit report factor into the score calculations. Although credit scoring models vary, generally, credit scores from 660 to 724 are considered good; 725 to 759 are considered very good; and 760 and up are considered excellent.
For recent versions of the FICO and VantageScore credit scoring models, paying off a collection account may help improve your scores. According to Experian®, one of the three major credit bureaus, that's because these credit scoring models only penalize unpaid collection accounts.
Is it better to have a collection removed or paid in full? ›
Paid collection accounts typically have less negative impact on your credit score than unpaid ones.
Why did my credit score drop when I paid off collections? ›
If you take out a loan to consolidate debt, you could see a temporary drop because of the hard inquiry for the new loan. Your credit score can take 30 to 60 days to improve after paying off revolving debt. Your score could also drop because of changes to your credit mix and the age of accounts you leave open.
Should I pay a charge-off in full or settle? ›
Should I Pay a Charge-Off in Full or Settle? It's best to pay a charge-off in full rather than settle an account. Remember, settling an account is considered negative because you're paying less than you owe.
Why does my credit score go down when I pay in full? ›
It might reduce the types, or 'mix,' of credit you have
But now you have one less account, and if all your remaining open accounts are credit cards, that hurts your credit mix. You may see a score dip — even though you did exactly what you agreed to do by paying off the loan.
Is it bad to immediately pay off a credit card? ›
By paying your debt shortly after it's charged, you can help prevent your credit utilization rate from rising above the preferred 30% mark and improve your chances of increasing your credit scores. Paying early can also help you avoid late fees and additional interest charges on any balance you would otherwise carry.
What does it mean to pay your balance in full? ›
Your statement balance is the amount you owe on your credit card at the close of your last billing cycle. It won't reflect purchases made after the close of your credit card's statement period. Paying the full statement balance by your card's due date every month will allow you to avoid interest charges.
Should I pay remaining balance or full balance? ›
You should always strive to pay off your statement balance in full each month by the due date to avoid costly interest charges. It isn't necessary to pay off the current balance before the end of a billing cycle, but doing so can help maintain a low credit utilization and boost your credit score.
What is the difference between paid in full and settled in full on credit report? ›
"In other words, it means you did not pay your debts in full." Debt settlement involves working out an agreement between you and your creditor or a debt collector to pay less than you currently owe but still have the debt considered satisfied.
Should you pay the minimum or full balance? ›
It's a good idea to pay off your credit card balance in full whenever you're able. Carrying a monthly credit card balance can cost you in interest and increase your credit utilization rate, which is one factor used to calculate your credit scores.
