Can I Fix My Credit by Paying Only Half?

Credit card issuers and other lenders for unsecured accounts sometimes accept settlements for less than the amount you actually owe. You may pay as low as 50 percent of the actual balance. While this releases your liability for the bill, it does not necessarily help your credit rating. Other creditors know about the settlement when they see it on your reports.

Process

Your creditor will likely send your account to a recovery department when payment delinquency goes past 60 to 90 days. Such departments try to get you to resume payments, but the agents can usually offer other options when appropriate. The lender may agree to settle your debt for 40 to 50 cents on the dollar if you can pay that amount in a lump sum. Let the agent bring up the subject of settlements rather than requesting one outright. The bill status changes to "settled" on your credit reports once you pay.

Negotiations

Some financial companies negotiate what they report to the credit bureaus as part of a settlement. Aim for a "paid as agreed" status, which fixes your credit because other lenders do not realize that you only paid half of the bill. Otherwise the settlement notation is reported by the credit bureaus for seven years, according to the Federal Trade Commission. Ask for written confirmation of your agreement, including the amount and credit reporting details, before paying.

Alternative

Credit card issuers and other companies charge off unsettled debts once the delinquency reaches about 180 days, which adds a bad entry to your credit reports. The accounts are then sold to debt collectors, subjecting you to aggressive collection techniques and a possible lawsuit and court judgment. Collection accounts and judgments also show up in your credit files. You may still be able to make a discount settlement on a charge-of. Negotiate a "paid as agreed" status, just as you would when settling an active account.

Warning

The Internal Revenue Service considers the dropped part of your debt as taxable income. For example, if you pay half of a $10,000 debt, the government considers the remaining $5,000 as income to you. Make sure you have enough money to cover your increased tax bill when you make the settlement or you could face problems at income tax time.