Paying off Debt Is Better for the Credit Score Than Settling It

The difference is that settling a debt for paying off the collection account is going to have on our credit score may be subtle or completely nonexistent.  In either case the most important thing to note is that your account is already late and has been reported as delinquent to the credit bureau.  Having your account going to collection is one of the worst kind of negative information that can find its way onto your credit report.  In fact it is just short of filing for bankruptcy.  Once an account is reported as delinquent or being a part of collection account, the information has a negative impact on your credit score.  After that while the status of the account is closed, settled or paid will probably have little impact.  The fact that he did not pay your lender has agreed will already have done the damage.

When you settle a debt it means that you repaid the lender less money than you had initially promised to.  It shows that you did not meet the terms of the contract.  Hence this information is less positive than an account that is paid off.
If you pay off an account that has gone into collection it may improve your standing with the credit in the future especially if you have a personal relationship with him.  Because you paid off the account in full or because he is aware of your previous payment history he may be willing to work with you in the future and extend further credit.

In all cases once the negative information pertaining to a delinquent account finds its way onto a credit report it stays there on the records for a period of seven years from the date of the first reported delinquency.  Till the time this information is present on your credit report it will hinder your prospects with future lenders and impact your credit score negatively.  However, the timeframe here is important as the negative effect on your credit score will become less over time, provided that no new negative information is reported.

As to the wish of whether it is better to settle the debt or to pay off the collection amount in full, paying off a collection account in full many better your chances to work with the creditor in the future depending upon his personal decision.

Another factor that instills people to pay off the debt as soon as they can is their personal pride.  That may be just as vital as the affect on your credit score.