Unless reported otherwise, FICO considers a debt settlement as “not paid as agreed” account, which is still a delinquent account. Because of this, your credit score won’t improve even after you pay the agreed settlement amount.
In fact, your credit score may even drop further because the account age may update to reflect the settlement date. A younger delinquent account means greater negative impact on your Fico score.
If, on the other hand, the creditor reports the account as “paid“, “paid in full” or “paid as agreed“, your score would certainly improve after you pay because Fico considers all three as accounts in good standing.
What the creditor reports to the credit bureaus should be included in any settlement negotiation. Make sure the reported term is included in the settlement agreement, and have the creditor mail it to you in writing before you pay. More about negotiating a debt settlement here.
Another option in lieu of debt settlement is a “pay for delete” agreement. In a PFD agreement the creditor agrees to delete the account entirely from your credit report in return for you paying the account in full. More about PFD agreements here.