The short answer is, yes, debt settlement will affect your credit score.
Interestingly, according to myfico.com, the answer is different depending on your situation!
Situation One – You’re already late on one payment this year
For example, if you’ve already had a late payment in the past year, you’ll take a bigger hit on your credit score by being late with a payment rather than settling a debt for less than owed. Settling a debt will give you a hit, certainly, but it’s not the worst of the bunch for you (being late, maxing out, or settling a debt for less than owed).
Situation Two – You’re never late and have a high FICO score now
However, if you’ve got a high FICO score, if you’re never late, and if you’re in good shape as far as your credit score goes, then you’ll take a hit on your credit for any of the above. The worst for you, though, will be settling a debt for less than the total owed. Being late once won’t be as bad as that. Think about it: if you settle a debt you’re probably already late on a payment, so the effect on your FICO score is extra hard, since you had to be 1) late and then 2) settle the debt. That’s why you get a bigger hit on your score for settling a debt if your score is very high to begin with.
None of them have the same effect on different consumers, that’s for sure.
What do you think? What would be worse for your credit score, being late or settling a debt?