"Paid in Full" is better for your credit than "Settled for Less Than Full Balance," but the difference may be smaller than you'd expect, depending on which credit scoring model is being used.
How scoring models treat them:
Older FICO models (FICO 8 and earlier) treat both settled and paid collections similarly. The negative impact comes from the late payments and the collection account itself, not from whether you settled or paid in full. Once a collection is on your report, the damage is mostly done regardless of how you resolve it.
Newer models are more nuanced. FICO 9, FICO 10, and VantageScore 4.0 ignore paid collections entirely. So if you pay in full, the collection has zero impact on your score under these models. A settled collection still counts as a negative mark. The catch is that many lenders still use FICO 8, so you may not benefit from the newer scoring right away.
What mortgage lenders care about: If you're planning to buy a home, this distinction matters more than in other lending contexts. FHA loan guidelines require that collections over $2,000 be either paid in full or on a payment plan. Conventional loan underwriters look at both paid and settled accounts, but a "Paid in Full" notation is viewed more favorably during manual underwriting. VA loans are more flexible but still prefer paid-in-full resolutions.
The practical calculation: Say you owe $8,000 on a collection. The collector offers to settle for $4,000 (50%). Is the credit reporting difference worth the extra $4,000 to pay in full? For most people, no. The score improvement from "Paid in Full" over "Settled" on older FICO models is typically 10 to 20 points. On newer models, it's larger because paid collections are ignored entirely.
The best approach: If you can negotiate "Paid in Full" reporting at a settlement price, that's the ideal outcome. Some creditors and collectors will report an account as "Paid in Full" or agree to delete the trade line entirely as part of a settlement negotiation. It's worth asking. If they won't, settle for the lower amount and focus on building positive credit history going forward. The difference in reporting matters, but not as much as some credit repair companies would have you believe.
One thing both resolutions do equally: they prevent the creditor from suing you, and they stop further collection activity. Both are better than an unresolved collection sitting on your report.