If I Negotiate a Payoff, Will It Hurt My Score?

Q: I'd like to cancel out my looming credit-card debt but keep my credit score intact. Is it possible to negotiate a cash settlement with a card issuer without ruining my credit score?

Settling your debt for less than what you owe will likely lower your credit score a lot. True, if the issuer were to accept the lump sum and simply close your account, your credit score would not suffer. But that's not likely, warns Steven Katz, a spokesman for TrueCredit.com, a consumer-credit Web site owned by Trans-Union. The usual practice is for the issuer to report the number of days the account was delinquent and that the debt was settled for less than the full amount.

That would have a serious impact on your score, says Craig Watts, of Fair Isaac, the firm that created FICO scores. The impact on your score would lessen over time, but the black mark would remain on your credit report for seven years.

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But don't let your desire to keep your credit score intact prevent you from tackling the problem. Talk with a consumer counseling agency to see if a debt-management plan would work. That could be less damaging to your score than a settlement, says Gerri Detweiler, an adviser for Credit.com, a credit-education Web site. If not, try to negotiate a settlement -- but make sure that the creditor does not send the balance to a collection agency.