Does Negotiating Down Your Credit Cards Hurt Your Credit?

Sometimes, when a person owes a large debt to a creditor, rather than pay off the debt, he will attempt to settle with the creditor for a lesser amount. If the creditor accepts, the debtor will only be legally obligated to pay a portion of the amount he originally owed. This agreement is often preceded by a period of negotiation. While the negotiation itself does not harm a person's credit rating, receiving a settlement often does.

Credit Reports

A person's credit score is determined using all of the data listed in that person's credit report. This information is reported by creditors, such as credit card companies, that have extended the person credit. The report only contains information about the size of a person's debts and their disposition, such as whether the person has paid back the loan on time. A failure to pay back a loan in full will harm a person's score.

Negotiation

Negotiating with a credit card company about a settlement does not, by itself, harm a person's credit score. The credit reporting bureaus that maintain a person's credit report will have no knowledge of this negotiation. If the individual has already missed a payment on the credit card debt, her score will have been negatively affected. The person's credit score is only harmed if, after the negotiations, the debt is settled.

Write-Offs

When a person negotiates a settlement with a credit card company, the credit card company reports the settlement to a credit reporting bureau as a write-off. This means that the individual paid back only a portion of the debt that he owed the creditor. Any time that an individual fails to pay back less than the full amount of the debt, his credit score will be harmed, although exactly how much will depend on the size of the debt.

Credit Reporting

Although a credit card company will usually report the debt as a write-off to credit reporting bureaus, it is not legally obligated to. If it wished, the company could report the debt as having been paid off in full, which would do no harm to the individual's credit score. For this reason, some individuals may make it a condition of the settlement that credit card companies report the debt as paid in full rather than partially written off.