Paying off current debt and keeping your account balances down is a great strategy for improving your credit. On the other hand, settling old debts for less than what you owe can sometimes hurt your credit score.
Current Debt
Your account balances determine 30 percent of your FICO score, a credit scoring system used by many lenders in the United States. Lowering your current account balances by paying them off is a good credit score boosting strategy. Don't close your accounts, though, as this can harm your credit score, according to Maxine Sweet, Vice President of Public affairs at Experian.
Debt Settlement
If you are in financial difficulty and have accounts that are charged off, in default, or are in danger of default, settling your debt for less than you owe can be very tempting. Unfortunately, debt settlement can also lower your credit scores, so you may need to weigh this option against alternatives, such as taking out a debt consolidation loan.
Prevention/Solution
Keeping your account balances at under 30 percent of your available credit can significantly improve your credit score, according to financial writer Liz Pulliam Weston at MSN Money. If you do enter into a debt settlement agreement, try to get your creditor to agree, in writing, to report the debt as "paid in full" to avoid the damage that a "settled" account can cause.
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