Negotiating Reduced Payoff Can Hurt Credit Score

Did you know negotiating a reduced payment payoff with a lender negatively affects your credit score?

What you’re doing is actually settling the debt for less than you owe. As such, the lender will probably report the debt as “settled” rather than paid. Often it’s more important to get the debt off your back than to maintain a pristine credit score, but you should just be aware you might incur a ding. But don’t let that stop you from getting debt-free if that’s what it takes!

Negotiating reduced payments can hurt credit scores [Ask Max] (Photo: Colin Tobin)


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  1. laserjobs says:

    I should hope it hurts their credit score because they are a credit risk.

    • Duke_Newcombe-Making children and adults as fat as pigs says:

      @laserjobs: “…and let them decrease the surplus population.” Sheesh…

      • sammy_b says:

        @Duke_Newcombe sees what you did there…: I don’t think that’s the point he’s trying to make. If we ALL have perfect credit scores then the value and importance of having good credit goes down.

        Settling a debt shouldn’t automatically make it so that you can’t ever buy a home or a car, but a small ding so that it differentiates person A who always pays their bills on time from person B who let debt get out of hand but genuinely tried to make good as best they could is important when evaluating the worth of a credit score.

        • VisionFromAfar says:

          @sammy_b: Assuming that’s how the system actually worked, that would be wonderful. But here at Consumerist, we all know better, right?

  2. TehWillis says:

    Perhaps the LAST thing you should worry about when you’re to the point of having to negotiate payments is how it’ll effect your “ability to bring on more debt” score.

    • idip says:

      @TehWillis: I think you’re right.

      But, at the same time the consumer should be aware that there are consequences to negotiating your debt, it’s not a get out of jail free card.

    • Tim says:

      @TehWillis: Credit score affects far more than your ability to bring on more debt. It also affects your ability to get employment, to get an apartment, etc. Which, for an unemployed person who just went through foreclosure, would really suck.

      So if I negotiate with a lender to settle a debt for less than it is worth, does that mean I’d be a bad employee?

      • Orv says:

        @TCama: If they’re using credit *scores* to determine whether they should hire people, they’re idiots. Credit *history* maybe.

        At the apartment complexes I’ve rented at, the credit scoring didn’t determine whether they’d rent to you, just how much of a security deposit they’d require. If you had a good score, you just had to put down a minimal deposit; if you had an iffy score, you had to put down first and last month’s rent plus the full deposit. For actually making the rental decision they were more worried about rental history.

      • vastrightwing says:

        @TCama: Not necessarily a bad employee, but employers use this information to determine their risk. While a service job is not likely to care about your credit score, a bank will care because you have access to their money. If you get yourself into debt, a bank may consider your employment as a possible risk that you might try to take money if given an opportunity.

  3. Johncc says:

    In a perfect world we would all be the magnificent being you obviously are. But for me ,After 20 years of never missing a payment or being late! 9 months of unemployment ate through my savings and negotiation was the only option . Yet now I am a risk in your eyes . May I offer a resounding Hurrah for you you are an amazing superhuman being I wish I was just like you….. NOT !

    • Rachacha says:

      @Johncc: I don’t know how you came into debt for over 20 years, and I am sorry that you lost your job, but regardless of your situation, you are still a credit risk.

      Look at it this way. A friend or co-worker asks to borrow $10 because he forgot his wallet, and you help him out. The next day he gives you $1 as a good faith gesture, but again, it is all that he has because he forgot to stop at the ATM. The $1 daily payments continue for a few days until one day he just stops paying you when he still owes you $5. You relieve him of that debt, telling him not to worry about it, but I can guarantee that the next time he asks to borrow $10 you are probably going to hesitate and wonder how much helping your friend is going to cost you simply because of your past history with him.

  4. FDCPAGuy says:

    yes a Partial Payment notation will be added to the account which 2 out of 3 bureaus will interpret this notation as a seriously delinquency. It will have a large impact on the fico score more than likely.

  5. Sure I could agree with you, but then we'd BOTH be wrong. says:

    First, let me start with the wording. From reading the headline about “reduced payments” (plural, payments) I was thinking this meant that you call the creditor and say “Instead of the minimum payment of $200 per month, can I have reduced payments of $100 per month until this is paid off”

    Reading further, I see you mean “Debt Settlement” or, if you owe $5,000 – making an offer to accept $3000 as “payment in full” — Of course this is going to affect your credit, since it is a settlement. But at least it’s paid off, and you really don’t need MORE Credit right now — Take the credit score hit and worry about your score when you are out of debt and able to take on new credit (responsibly)

    Anyhow, I want to point out … Besides hurting your credit score, that settlement will do something else, as well.

    In my example above, you just received “income” of $2,000 (the $2,000 of the debt that they “forgave” ) and guess what? You have to pay INCOME TAX on that forgiven amount, or in this case, whatever your tax bracket deems as tax for $2,000 of income.

  6. BritBoy says:

    Yep, misleading headline for sure. Reduced payments is very different to a negotiated reduced outstanding balance which most certainly would reduce credit worthiness.

  7. Dont lump me into your 99%! says:

    Or do I am going to do and file bankruptcy (no cc’s btw), and take the credit blow, and within a year of showing off good payments, you will be much better off.

  8. HIcycles says:

    Speaking of killing your credit, I just learned this little gem from my mortgage loan officer:

    If you have a delinquency and you pay it off, it, too, hurts your credit score.

    I learned this the hard way. Apparently, some many years ago, when I canceled by T-mobile account (at the time, VoiceStream. Remember VoiceStream?), I had a balance of something around $50. Obviously, I never paid it (hence the delinquency), but when I got a collections notice, years later, I was like, oh, I’d better pay this. So I did. Little did I know that my score would drop by almost 20 points!

    Can someone explain the logic of this to me?

  9. lmarconi says:

    i hear that breathing hurts your credit score…

  10. wcnghj says:

    “Settled” or “Paid”

    FICO doesn’t care, a negative is a negative.

    • Tank says:

      @wcnghj: Nope, FICO don’t care… but the lenders do. Who wants to loan money to someone who bought a tv for $1,500 then settled with the credit card company for $700?

  11. wickedpixel says:

    If the creditor is willing you can negotiate what gets reflected on your credit report into your settlement.

  12. duffbeer703 says:

    Who cares about credit score… you also get an IRS bill. The IRS considers forgiven debts to be income. So you trade a stupid credit card bill into tax bill.

    • treimel says:


      In what way is forgiven debt *not* income? If you don’t think it is, I have a little deal for you: I’ll go into debt to you for ten thousand dollars, then you go ahead and forgive that.

  13. tankertodd says:

    No Shit Sherlock. If you have problems with credit why wouldn’t your credit score take a hit?

  14. Ronin-Democrat says:

    it seems no matter what you do that is good for you is bad for your score.
    drop a card because they raise your rate to astronomical rates hurts your score.
    settle your debt for less hurts your score.

    ignore those and other things and do what is best for you financially…..

  15. LeChiffre says:

    I know what all of you are saying, but my home lost 25% of its value. How am I going to get it back? Why should I pay $30k for something that doesn’t exist? I didn’t buy a house that was out of my price range nor am I broke paying for the mortgage, but I’ll never gain that money back. No way, no how. Hell, I may as well give one of you folks in this forum $30K for nothing, because that is what I am doing to Wells Fargo. What they’re getting is free money from me; nothing less than that.

    • GuidedByLemons says:

      @LeChiffre: Not sure what this has to do with the post, but uh:

      You’re paying $30k of a debt you owe. When a bank outlays $120,000 (or whatever) for you to buy a house, you owe them $120,000, regardless of what happens to the value of the house after the fact.

      You might as well ask why you should pay a credit card balance you racked up on groceries. Why should I have to pay for food that’s long gone down the sewer? I’ll never get that food back!

    • PunditGuy says:

      @LeChiffre: Should Wells Fargo increase your mortgage if your house value goes up?

    • madanthony says:


      What they’re getting is free money from me; nothing less than that.

      Huh? They aren’t getting free money. When you take out a mortgage, they write a check to the seller for the amount you agreed to pay for the house. You are paying them back the money that they paid to the seller, plus interest. They are doing exactly what they agreed to, and not making any more than they would had the value of the house stayed the same or gone up.

      I’m in pretty much the same situation – $210k house bought in ’06, another one in the development sold a few months ago for $175k. Not thrilled, but it’s not the bank’s fault. It’s mine, although I made what seemed like a good decision at the time with the info I had available.

  16. captainpicard says:

    While this article may be absolutely true and non misleading i think that most people take thier credit scores too seriously. Now don’t freak out and think that I am saying something I am not. Credit scores are very important, BUT, you have to take a look at your current situation vs. your long term situation. 5 years ago my wife and I decided we needed help with our debt and we settled somethings with some credit card companies. We knew it would be a hit to our credit scores but our long term plans didn’t really have any pressing credit needs. To help us in the current situation (get out of debt and start saving) we took the hit so we would be better off.

    tl;dr; Sometimes taking a hit in credit is worth it if the short term gain outweights the semi-long term (7 years?) effects.

    • roat says:

      @captainpicard: Hear Hear! I got forced into a 13 a couple of years ago in the wake of an ugly divorce. Freaked at first; guilt, shame, sense that I had betrayed all the early training from Depression-era mom and dad. Stepped back, took a deep breath, and decided to move forward on a cash-only basis. No problems. Lifestyle is Just Fine. True soulmate and I are perfectly happy. Nine months of liquid padding in the bank as a job loss hedge, growing all the time as the 13 effects slowly taper off. Mid six figures and growing in the IRAs, with plenty of years before the magic R date. Projected seven figures by then.

      And Visa, MC, and their ilk will *never* see my business again. It’s most definitely doable! Long term thinking FTW!

  17. quail says:

    I say go for the reduced payoff amount if you have to. That ding on your score lasts 7 years, it may not be reported to all credit agencies, and as long as it’s the only thing on your credit report it won’t keep you from getting other credit cards.

    But weigh the pros and cons carefully. In the end, as it was for me, the reduced payoff can save 3 to 4 years of working for the credit card companies and comes with only a 7 yr penalty on your report.

  18. suezahn says:

    Less than two years ago, the only debt I had was my mortagage and my car. Then I got hit with two seperate major medical situations, both of which were conveniently ducked by my “good” health insurange package from work. (That’s a whole other rant…) Now I’m literally struggling from month to month to make minimum payments, cutting everything I can, and have only stayed one step ahead so far because of little bits of money falling into my lap here and there, but it’s nothing I can count on. Because my full-time job requires me to be available for overtime without notice (although hardly any overtime happens anymore), I’m stuck in a catch-22. So either I try to negotiate reductions in payments/debt, or I eventually default on something, which is only a matter of time. I have no idea what to do anymore, I’m desperate, and at this point anything I do–or don’t do–will hit my credit score…so which is my best option?

  19. RBraden says:

    Citibank is unfriendly. They canceled our Shell card because we never paid any interest. We just won’t buy what we can’t pay for in thirty days.