The New York Times (Stock Quote: NYT) ran a piece Monday about credit card companies slashing balances for delinquent cardholders in exchange for full payoff. The piece, Credit Bailout: Issuers Slashing Card Balances, reported that credit card issuers are accepting 50 cents on the dollar—sometimes even less—from people who pay up.

The examples in the article were, well, inspiring.

Too bad about the gaping hole in their reporting.

The Times wrote about Edward McClelland, “a writer in Chicago, [for whom] deliverance finally arrived a few days ago. Mr. McClelland’s credit card company was calling yet again, wondering when it could expect the next installment on his delinquent account. He proposed paying half of his $5,486 balance and calling the matter even. It’s a deal, the account representative immediately said, not even bothering to check with a supervisor.”

What the Times article incomprehensibly fails to mention is that these credit card settlements have incredibly adverse effects on one’s credit score.

“A settled account is considered a major derogatory item,” says John Ulzheimer, president of consumer education at and a contributor at CNBC. “It’s going to be just as bad for your credit score as a foreclosure, repossession, charge off, collection, tax lien, or a court judgment."

The Times does mention (rather casually) that "a delinquency, like a foreclosure, destroys a credit record." But they don't explain that a settled account hurts your credit score in the same way.

"As far as how many [FICO] points it’s going to be worth, it’s going to worse for someone with a FICO score of 800 than for someone with a score of 550,” Ulzheimer says.

So what this means is that if you’ve already got horrible credit, then a settlement may not drop your score much more. But if you’ve just become delinquent, and are trying to rectify the situation honorably by negotiating a settlement, then be prepared for a considerable blemish on your credit score.

Now, if you do have bad credit, there are other things to consider. A settlement might not take a chunk out of your score, but it will prolong the time it takes you to build up your credit, Ulzheimer says.

Finally, there’s the important issue of dollars and cents. If you go the settlement route, you are going to end up paying a chunk of your debt (maybe 12%, maybe 50%, maybe more) and your credit will have a seven year blemish. On the other hand, you could file for chapter 7 bankruptcy, have all of your credit card debt wiped out, have a 10 year blemish on your credit score, and your only out of pocket expenses will be your bankruptcy lawyer and court fees ( probably around $1,500).

To be fair, a bankruptcy has a worse impact on the credit score than a settlement because of the breadth of the filing (it usually involves multiple accounts, whereas a settlement is just one), but a settlement is definitely not a get-out-of-jail-free card. By failing to note the adverse credit repercussions, the Times article makes it sound like it is.

Related Stories:
Why Store Credit Cards Can Be a Bad Idea

How to Negotiate Your Credit Card Bill

Credit Score 101: What Determines Your Score