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Should You Pay Off Debt or Settle It? What’s Better?

Last updated 03/15/2024 by

TJ Porter
It is alway preferable to pay off your debt in full, IF possible. Although settling your debt for a smaller amount will not hurt your credit as much as not making any payments, it is still considered a red flag for lenders. However, there are times when settling your debt can be a smart move. This article discusses the pros and cons of debt settlement and when it can be a reasonable debt relief option.
If you find yourself in debt, the best option is to make your monthly payments so you can reduce your balance and eventually become debt-free. However, many people find themselves in a situation where their monthly payments are too high, their high-interest debts will take decades to pay off, and they have bad credit so they don’t qualify for debt consolidation loans with lower interest rates. In such cases, debt settlement, which involves negotiating with lenders to pay less than you owe, can provide a way to get out of debt. However, debt settlement isn’t a panacea. It usually has serious consequences to your credit. Still, these consequences are often a better alternative to falling behind and having your debt sent to a collection agency.
Consider these scenarios
Barbara carries a credit card balance of about $4000. She cannot afford to put any money into savings each month, but she is slowly chipping away at her credit card balance.
John and Mary have a credit card balance of $10,000, which is spread over 3 credit cards. Though they pay more than the minimum payment on each of their cards, they cannot seem to make any headway with reducing their principal credit card balance.
Jillian puts a small amount on her credit card each month. It varies from $100 to $500 and has never been more than that. She is able to put some money aside each month into a savings account, and she dabbles a bit with investing.
Looking at each of these scenarios, it is clear that debt and its consequences vary. For this reason, appropriate ways to handle debt can vary as well.
If you owe more than you can afford to pay and are considering settlement, consider these tips.

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When should you pay off your debt?

Debt settlement isn’t the answer to every situation. There are many scenarios where paying off your loans instead of settling them is the best course of action.
For instance, if you have purchased a home and are making regular mortgage payments, that is considered to be “good debt.” Why? Because home values typically appreciate in time, your mortgage is actually an investment in your future financial well-being. Similarly, student loans often fall into the good debt category because they are an investment in your future.
If you have good loans and generally don’t have trouble making your monthly payments, following the payment schedule is the best course of action.
However, not all debt can be considered “good.” For instance, carrying a large credit card balance is bad, especially when the interest rates are high. Additionally, things like gambling debt, payday loans, and rent-to-own debt are all considered bad because they do nothing to improve your financial standing. Rather, they tend to put a real ding in your credit score.
If you have large amounts of bad debt that is showing up on your credit reports, increasing your credit utilization, and damaging your credit scores, debt settlement might be a good idea. Similarly, if you owe so much that you’re struggling to make your monthly payments, finding a way to settle with your credit card issuer or other lender is a good alternative to missing payments and damaging your payment history.

Should you pay off debt, save for an emergency fund or retirement, or pursue investments?

In a perfect world, you would have enough income each month to buy necessities, save, and pay your monthly loan bills. However, the world is far from perfect for most consumers.
Research indicates that 42 percent of American credit card holders carry a balance (source), meaning that they do not pay off their credit cards in full each month. In total, American revolving debt currently amounts to $953.3 billion (source).
So, should you be concentrating on paying off debt or building up savings? Both goals are noble and both goals can lead to financial success.

The advantages of paying off your debts include:

  • Saving on interest costs.
  • Building a solid credit score.
  • Eliminating constant anxiety about burdensome bills.

The advantages of savings

On the other hand, building up a savings fund results in other advantages, including:
  • Having cash available for emergencies.
  • Reaching long-term financial goals like buying a home or retiring.
  • Not having to borrow money in emergencies
For most people, a mixture of saving and debt repayment is the best course of action. Determining when to funnel your money to paying debt and when to start saving depends on which course of action will net the most benefit for your personal situation.
For instance, if the interest rate you are paying on outstanding debt exceeds the interest rate you can earn on the money you save, the better option may be to pay off your debt first. Then, set aside some savings.
Even if you decide to pay off your debts before investing strongly in savings, you might want to consider building up a small emergency fund of $500 to $1,000 first.

What are some debt payment strategies?

Once you commit to paying off your debts, there are several strategies to help you get to a debt-free status. Here are some of the more popular ways to reduce or eliminate your debt:

Pay more than the minimum amount due

If you can’t pay your full balance in a single lump sum, the easiest way to pay off loans quickly is to pay more than the minimum due each month.
If your credit card balances are not exceedingly high, you might find that simply paying more each month reduces your balance more quickly than you might think. To illustrate, consider this scenario:
Suppose you owe $5,000 on a card with a 15 percent interest rate. Paying a minimum payment of $112.50 per month, it will take you over 22 years to pay off your loan and cost you over $5,700 in interest alone. However, if you make payments of $225.00 per month instead, you will shave off 12 years and over $3,500.00 in interest. If you can pay $300 per month, you can cut that time to a little over 6 years and reduce your interest to just a little over $1,200. By paying a bit extra, you can save a lot of time and money.
When they send your bill, many credit card issuers include information about how quickly you’ll pay down your balance by making different monthly payments. At a minimum, they should tell you how long it will take to repay your balance if you make the minimum payment each month. This can help you decide how much to put toward your credit card on a monthly basis.

Create an avalanche

If you have multiple credit cards with different interest rates, you can prioritize them from highest rate to lowest rate.
If you follow this method, you’ll pay the minimum due on each of your cards and put any extra income you have toward the card with the highest rate. When that card is completely paid off, proceed to the next card and so on, until all your cards are paid.
The benefit of this method is that it reduces the amount of interest that you have to pay. The drawback is that it doesn’t offer the quick gratification offered by the snowball method, which pays off the smallest balances first.

Try for a snowball

Another method that works if you like to see more immediate results is the snowball method.
With this strategy, you choose to pay off the card with the smallest balance and pay only the minimum amount due to your other cards. Once the card with the lowest balance is paid off, you proceed to the next card in order until all cards are paid in full.
This method works because achieving small successes encourages you to stick with your repayment plan over time. Paying off a card also eliminates a monthly payment from your budget. If your budget is tight, this strategy can help give you more flexibility on a month-to-month basis.

Negotiate for a better rate

If you have a good credit score and you are not currently delinquent with your payments, it may be possible to negotiate a better interest rate on your loans and credit cards. Sometimes a simple phone call explaining your situation will yield surprising results. Many credit card companies are willing to reduce your rate in hopes that this accommodation will keep you from defaulting on your debt.

Can you consolidate your debt with a balance transfer credit card?

If you have good credit, you may be able to consolidate your debts onto one credit card with a lower interest rate. If you choose this option, look for a card with a 0-percent introductory interest rate that is valid for at least 12 months. Many credit card issuers have products designed specifically for this purpose.
During the introductory period, the card won’t accrue any interest, so each dollar you can put toward your debt goes straight toward paying it off instead of paying interest charges.
Consider this before consolidating your debts with a loan.
  • First, there is typically a fee involved. That means that even a card with a 0-percent interest rate is not truly free.
  • Second, applying for a new credit card may have a minor impact on your credit score. If you can find a credit card company that uses a “prequalified offer,” it is less likely that your credit score will be affected.
  • Third, applying for a new card may tempt you to overspend. For a balance transfer card to really work, you need to commit to using it only to consolidate other higher interest rate cards and end any spending habits that make you accumulate new debt.
  • Fourth, will the credit limit of the new account be sufficient to transfer your other debts to the card?

Should you consolidate your debts with a debt consolidation loan?

In some cases, you may find that a debt consolidation loan is a reasonable option for getting out of debt.
Consolidating your debts means getting a loan and using that money to pay off other loans or credit cards. This leaves you with a single monthly payment to make. If your consolidation loan has a low interest rate, it can also reduce the interest you have to pay.

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There are a few factors to consider before you get a debt consolidation loan.
First, you must decide whether you are willing to put up collateral for your loan or whether you prefer an unsecured loan option. Putting up collateral like your home may help you get a lower interest rate, but it can also put your home at risk.
On the other hand, an unsecured personal loan may have a higher interest rate than you want to pay. Before making a final decision, it is important to crunch the numbers and be sure that a loan will get you out of debt more quickly and easily than simply paying your bills as they are now.
If you have a bad credit score, you may not be able to get a new loan or credit card account to use to consolidate your loans, meaning you’ve damaged your FICO score by trying to open new accounts for n

Debt Settlement

Debt settlement is a process in which you negotiate with your creditor to have them forgive your balance in exchange for a payment that is less than the full amount that you owe.
For example, if you owe $10,000, you may offer your lender a lump sum payment of $5,000 to settle the debt. If your creditor accepts, they’ll forgive the remaining $5,000 balance on the account.
Negotiating with lenders can be stressful, so there are many companies that offer to help with this process. They often brand themselves and debt management or debt resolution companies. They’ll serve as partners that specialize in settlements and can assist you with negotiating with creditors. They can also work to reduce the credit score impact of settling debts instead of paying them in full.
Here are a couple of things to consider when looking for a debt settlement company.

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Do they have minimum and maximum limits on the amount of debt you can enroll?

Most companies require you to have a minimum amount of debt, which is usually around $10,000. Some lenders, such as Freedom Debt Relief, accept lower amounts. Others also have a maximum amount of debt you can enroll, such as $100,000. You will need to find a company with requirements that match your needs.

What is their customer service like?

We typically don’t care about the customer service of a company until we run into problems or have questions. It is important to find out ahead of time about the level and quality of support provided by a company. You can do so by researching the ways you can contact their customer support team (phone, email, live chat, etc.) and by reading reviews from past customers. Look for companies like Debtmerica Relief and Rescue One Financial which are recommended by our community of users. Other debt settlement firms to consider are Pacific Debt and National Debt Relief.
Another thing to keep in mind is that the industry is also rife with scammers looking to prey on people who are desperate for help dealing with their creditors. The Consumer Financial Protection Bureau collects reports about these businesses so you can do research to find out whether the one you’re thinking about working with is legitimate or not. Be careful, because sometimes debt settlement companies will change their name to make it difficult for people to learn about their poor service or negative reputation.

Benefits of debt settlements

The advantage of debt settlement is obvious. If you can negotiate with a creditor, settling a debt can save you a lot of money compared to paying the full amount. You’ll get out of debt more quickly and have more flexibility in your budget.
Settling can also stop collections calls and reduce the stress of figuring out how to deal with all of the bills that come in.

Disadvantages of a debt settlements

Debt settlement can save you a lot of money, but there are drawbacks.
One is that debt settlement companies often charge high fees for their services. There’s no guarantee that any of your lenders will be willing to negotiate, so you might wind up paying one of these companies and not getting much out of the deal.

Debt settlement will appear on your credit report

Debt settlement can also have a significant effect on your credit score. When you settle a debt, your creditors will likely report that account to the credit bureaus (Experian, Equifax, and TransUnion) as “settled for less than agreed” or “settlement accepted.”
This drops your FICO score like a stone, and the effects of debt settlement on your credit score can last up to seven years. However, settling a debt means less damage to your FICO score than missing payments or letting your loans get sent to debt collectors, making it the lesser of two evils.
Ultimately, a settlement should be considered as a last resort option only for people with overwhelming debt who cannot qualify for reasonable loan rates or renegotiate more favorable terms with their creditors.
If that is your situation, it is important to find a reputable debt settlement company to handle the matter. You can check out SuperMoney’s unbiased reviews here.


Dealing with loans can be a headache, but it’s an important thing to do. If you have manageable monthly payments, but in the work to pay off your loans as quickly as possible by making extra monthly payments.
If your loans are insurmountable and your credit score is already damaged, making the decision to look at debt settlement groups and asking them to work with you to make a deal with your creditors may be the right one. This will have a negative impact on your credit score in the short term, but getting out of debt is the first step toward building a stable financial life and rebuilding your credit score.

SuperMoney may receive compensation from some or all of the companies featured, and the order of results are influenced by advertising bids, with exception for mortgage and home lending related products. Learn more

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