Settled in Full vs. Paid in Full: Which Is Best?

Loans, Personal Loans, Secured Loans

Debt can be a confusing part of life, especially when your options to pay it off sound similar but are totally different.

Settled in full and paid in full are two debt repayment options. In both cases, your balance decreases to zero, and your account is closed. But each option has a different impact on your credit – and it’s important to know what they are.

We’ll give you the information you need to know the difference between “settled in full” and “paid in full” and which one is best for your situation.

What Does ‘Settled in Full’ Mean?

Settled in full means your debt was paid off for less than the remaining balance.

You agree with your lender, creditor or debt collector to pay an amount that is less than what you owe, but your debt is satisfied. Your payoff option could be a payment plan or a lump sum payment.

Settling debts is typically an option for unsecured debt, like credit cards or personal loans, not secured debt, like home loans or auto loans. When you’ve settled in full, it may signal to lenders that you’re a less reliable borrower because you couldn’t fulfill your payment obligations.

What Does ‘Paid in Full’ Mean?

Paid in full means the remaining balance of your debt, including interest, was paid off.

Paying in full is an option whether your account is current, past due or in collections. It’s better to pay in full than settle in full when it comes to paying off debt. When you’ve paid in full, it means you’ve made all of your payments. It’s a signal to lenders that you can fulfill payment obligations.

Is Settling or Paying Off Debt Better for Your Credit?

When it comes to your credit, paying off your debt in full is the best option. But what happens if you settle in full?

Settled in full

Having “settled in full” on your credit report can negatively impact your credit for up to 7 years, but sometimes it’s your only option – and it’s better than defaulting. The good news is that as time goes on, its impact on your credit will lessen. And depending on your situation, it may be better to have “settled in full” recorded on your credit report than carry a lot of debt.

Paid in full

Having “paid in full” on your credit report has a positive effect, especially if you paid your bills on time. Remember, on-time payments are a major factor in your credit score’s calculation. If you paid your debt in full and on time, your accounts are in good standing. On-time payments will stay on your credit report for up to 10 years.

When Should I Settle a Debt?

Life happens. And sometimes you may end up with more debt than you can handle. It may be in your best interests to settle your debt when:

  • You’re significantly behind on your payments, and it’s unlikely you’ll be able to pay off the debt in a reasonable amount of time.
  • You can’t pay off the remaining balance.
  • You don’t qualify for a debt consolidation loan, loan forbearance or loan deferment.
  • You’ve borrowed a lot of money and want to lower your credit utilization (how much of your credit limit you’ve used) and your debt-to-income (DTI) ratio (how much debt you have compared to your pretax income) so you can start saving more money or make a large financial investment, like buying a home.

No matter why you decide to settle, you’ll want to start the process before your account(s) is sent to collections.

Approximately 90 days after your last missed payment would be a good time to talk to your lender or creditor to see what your next steps are. Ninety days is enough time to demonstrate that you’re having difficulty making payments, but not too long that your account(s) gets sent to collections.

Debt settlement companies

You can use a debt settlement company to help you negotiate a settlement – but it can be risky. Debt settlement companies can charge a high fee for their services (it’s usually a percentage of the settlement amount), and it may take a long time to settle.

The company will likely ask you to deposit monthly payments into an escrow-like account. With that money, the company will pay off your debt in one lump sum. They may also ask you to stop making regular payments to your lender or creditor. Not making regular payments would only add more negative remarks to your credit report and continue to hurt your credit score.

Some debt settlement companies are legitimate, and some are scams. Make sure to do your homework and vet the company you plan to work with so you can avoid being misled.

Are There Alternatives to Settling a Debt?

Before you jump into settling your debt, there are other options that might not have as much of a negative impact on your credit. If you don’t want “settled in full” recorded on your credit report, consider:

  • Renegotiating: Renegotiate terms, like a longer payment period and lower monthly payments, with your lender, creditor or debt collector.
  • Applying for a deferment or forbearance: Talk to your lender to see if you qualify for a deferment or forbearance. Both options allow you to temporarily postpone payments. (FYI: No interest accrues on the remaining balance with a deferment.)
  • Loan forgiveness: You may qualify for student loan forgiveness if you can prove financial hardship to your lender.
  • Debt consolidation: Combining your debt into one loan with one monthly payment may result in a lower interest rate and make your debt easier to pay off.
  • Nonprofit credit counseling: Find a nonprofit counselor to help you figure out how to handle your debt and give you advice on repayment strategies. Look for counselors accredited by the National Foundation for Credit Counseling  or the Financial Counseling Association of America.

Bankruptcy is another option – but it should be a last resort. Chapter 7 bankruptcy can reduce or wipe out your debt, but it can also have a long-lasting negative impact on your credit report, and you may have to give up some of your possessions.

Settling for Less Can Relieve Stress

Settled in full and paid in full are not the same. And it’s important to know that paying your debt in full is the better option when it comes to your credit.

If you can’t pay in full, settling is better than defaulting on your debt and may relieve some stress for you. Just make sure that you’ve exhausted all of your options before deciding that settling is the best course of action.

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