When you are unable to pay back a debt that you owe in full, you might choose to settle the account. While a "settled" status on your credit report will show that you don't owe a debt anymore, it is still considered a negative mark because it indicates that you did not pay back the full amount that you owed.
Having a settled account on your credit report can lower your credit score, and these accounts will usually stay on your report for seven years after the date of first delinquency.
Though companies are not obligated to remove settled accounts from your credit report unless they are there in error, there are a few things you can try if you want to have it removed. Beyond filing a dispute for inaccuracies, you can try and strike a pay-for-delete agreement, send a goodwill letter, or send a hardship letter. If these options don't work, you can wait for the mark to fall off your report and work on building your credit in the meanwhile.Ultimately, settling debt is better than not paying it back at all, but it's still inferior to repaying the entire debt when it comes to your credit score and report.
If you have been behind on payments for a period of time, you might choose to settle the debt. This means that you and the creditor or debt collector come to an agreement where you pay less than the amount that you owe in order to satisfy the debt.
You might wonder why any lender or creditor would consider accepting an amount of money that isn't the full debt amount. After all, wouldn't all consumers try to settle their debt in order to save money?
The truth is, though, that trying to collect an unpaid debt is a costly endeavor for credit card companies and lenders. If they aren't able to coax you into paying what you owe, pursuing a lawsuit gets even more pricey. Additionally, there's always the chance that you could end up filing for bankruptcy if your finances are in really bad shape, which could leave the creditor in a position where they don't receive any of what they're owed.
From the consumer side of things, settling a debt can be harmful to one's credit. It's, therefore, not a useful strategy at all to hold off on making payments and hopes for a settlement down the road. Beyond that, a consumer might not receive a settlement they are happy with and could even end up getting sued by the lender or creditor. At the same time, settling debt is often a better option than not paying a debt back at all.
Though a settled account might sometimes be referred to as a closed account, as the account is no longer active, technically, settled accounts and closed accounts represent two different outcomes for a particular credit obligation.
Both settled and closed accounts will continue to appear on your credit report for a set period of time. Closed accounts typically have a more positive connotation compared to settled accounts, as the implication is that the consumer fulfilled their financial obligations as outlined in the original terms of the loan or line of credit.
If you're wondering what happens when you close a credit account when you still owe money, take a look at our article about closing a credit card with a balance.
When you settle an account, it will still show up on your credit report for seven years after the first date of delinquency. The original delinquency date is the day that it was first noted that a payment was late on the account.
Settled accounts usually stay on a credit report for seven years and tend to have a negative impact on credit. However, the impact of settled accounts on a consumer's credit score typically diminishes over time.
Since a settled account indicates that the creditor accepted an amount of money that was less than what you fully owed, it is considered a negative entry on your credit report. This means that it will usually reduce your credit score. That being said, the impact that a settled account has on your credit score will diminish over time.
Though settling an account is better than not paying at all, that doesn't mean it won't have a negative impact on your credit report. If you are unable to fully pay back what you owe, settling can be a reasonable option rather than letting the account go delinquent or default on it entirely.
Settling a debt can impact your credit in a few ways:
- Increasing your credit utilization ratio because the account will be closed
- Late payments often lead up to a settlement, and your payment history is a big part of your credit score and will show up on your credit report for years
- If the account is unpaid for an extended period of time, creditors can resort to a charge-off and send the account to a debt collector
- You can appear to be a riskier borrower to future potential lenders
- If you're saving up money to make a lump-sum payment, it could mean you miss more payments in the meanwhile and further damage your credit
You might think that since you are reducing your debt obligations, settling a debt should actually help your credit score. However, participating in a debt settlement plan will modify or negate the original credit agreement which can ding your score.
Additionally, if you apply for loans or credit in the future, you might find that lenders are reluctant to loan your money or extend lines of credit to you due to the presence of a settled account on your report.
At the same time, having a high account balance and late payments on your report has likely already hurt your score. It's possible that settling debt is your best path toward improving your credit score in the long run, so it can be worth accepting a temporarily lower credit score to help you achieve a sounder financial future.
Unless the information regarding a settled account on your credit report is inaccurate, you are technically not supposed to be able to remove them. Even though the lender is no longer trying to collect on the debt and you repaid part of the debt based on the settlement agreement, these settled accounts will stay on your credit report for seven years.
You might be wondering what your options are if the information is accurate, but you would still like it to be removed from your account.
While there is no guarantee that you'll be successful, three of your options include:
In the next section, we'll take a look at the different steps you'll need to take if you choose to pursue one of these options or if you need to dispute a settled account that appears in error.
If a settled account appears on your credit report and the information is accurate, there is no guarantee that you'll be able to have them removed. If it is an error, you can dispute the information with the credit bureaus and the lender or debt collector.
Even if the account isn't on your report inaccurately, there are a few things you can try when it comes to having the tradeline removed.
To make sure you cover all of your bases, it's usually best to contact both the credit reporting company as well as the credit card company or lender that provided the information when you need to dispute an error.
After you identify an inaccuracy on your credit report, you will want to contact all of the credit bureaus that are reporting the error. You can do this by using their online dispute center portals, calling them, or sending a letter through the mail. You can find the contact info for the credit bureaus here or on the Consumer Financial Protection Bureau site.
When contacting the company that provided the incorrect information, you can either call them on the phone or send them a letter. The CFPB provides both a template letter and instructions for sending a letter to the furnisher when disputing an inaccuracy.
You can sometimes work out an agreement with the lender or creditor where, in exchange for paying off all or part of the debt, they agree to remove specific negative information from your credit report.
This is known as a pay-for-delete agreement. Though companies have no obligation to participate in this type of agreement, it doesn't hurt to try.
One important note is that you should always receive a written explanation of the agreement before sending your payment, including the fact that they are agreeing to delete specific information from your credit report. Debt collectors, lenders, and credit card companies alike are known for saying just about anything in order to encourage payment, and you should not trust that a verbal agreement will be upheld.
Note: When you negotiate a settlement for a student loan debt, either private or federal, you typically won't be able to receive an agreement from lenders to delete negative information from your credit report.
Even if your credit report is displaying accurate information about your debt settlement, you can try to send a goodwill letter to the creditor asking them to remove the negative information. Some borrowers have found success in this way, though it's worth noting that lenders are not obligated to help you out.
You will generally have the best chance of success with a goodwill letter if you have otherwise proven yourself to be a responsible borrower from the specific lender.
If you have experienced a specific hardship that has led to you falling behind on payments and in need of a settlement, you might consider sending a hardship letter. In a hardship letter, you will want to state your desired request for a modification to the agreement, including asking that they will not remove that "settled" status from your credit report.
Circumstances that typically qualify as hardships include:
Though lenders might be willing to show leniency when you can prove that you've experienced hardship, they are ultimately going to be primarily interested in recouping as much of their loan as they can. For this reason, it's important to clearly state why the modifications you're asking for will help them get some of their money back.
If you are unable to have the settled account removed from your credit report, your last option is to simply wait it out and work on building your credit in the meanwhile.
Though it can be discouraging to have a negative mark on your credit report, a settled account will usually only last on your report for seven years. In the meanwhile, you can take steps to improve your credit to lessen the impact that this derogatory mark has. The other good news is that the negative impact of a settled account and any related late payments will lessen over time.
Before I sign off, let's take a look at some of the most commonly asked questions about debt settlement and how it impacts your credit.
Paying off a debt in full is always a better option than settling a debt. That being said, settling debt is still better than choosing not to pay at all.
The benefits of settling a debt are as follows:
There are also some risks that you will want to consider when it comes to settling a debt, including:
Paying a debt in full is always better than settling. When you pay off the total amount of money that you owe, it will read as "paid in full" on your credit report. This indicates to future lenders that you have fulfilled the original terms of your agreement with the lender by paying the full amount due.
When accounts are closed in good standing, they will stay on your credit report for up to ten years. The positive payment history that you have on these accounts will continue to keep your credit score strong. Though getting out of debt can feel overwhelming, you might find that using the debt avalanche method, the debt snowball method, or applying for a debt consolidation loan or balance transfer credit card can help you start digging your way out.
According to the National Foundation for Credit Counseling, a consumer's credit score can be lowered by 100 points or more by engaging in debt settlement practices.
Though this might be shocking and unwelcome news, it's worth noting that the exact impact debt settlement will have on your credit score will vary from person to person. The amount of debt owed on the account can also influence the impact.
Usually, a person with a higher credit score will see a greater impact from debt settlement than a person that already has a lot of negative marks on their credit report. At the end of the day, though debt settlement isn't as ideal as paying an account in full, it is still better for your credit than not paying back the debt at all.
One thing you want to consider is that there are a number of actions that can be taken that will actually restart the debt statute of limitations. The statute of limitations is the amount of time in which a creditor or debt collector can take legal action against you to try and recoup an unpaid debt. Each state has its own laws for the length of the debt statute of limitations.
Though debt collectors and creditors can still try and collect on old debts after the statute of limitations has passed, an expired statute of limitations can serve as a defense in court if sued for a past-debt.
Some of the things that can restart the clock on the debt statute of limitations include:
For this reason, it's always important to be very careful if you're communicating with a debt collector or a creditor about a debt. They can be pretty sneaky and might intentionally try and get you to say something or take an action that will restart the clock on the statute of limitations.
Having a settled account on your credit report isn't ideal-- it can signify to lenders that you didn't repay the full amount of a debt you owed and otherwise hurt your credit score. Though there is no guarantee that you will be able to remove accurate info from your credit report, you can try to have a settled account removed by:
Otherwise, you can wait for the mark to fall off your credit and work to build your credit in the meanwhile. If the account appears in error, you'll want to dispute it both with the credit bureaus and the companies that are reporting the incorrect information.
The notion of credit scores and credit reports might seem fairly abstract, but the reality is that they can have a very real impact on your life. When you have strong credit, it can make it easier to get approved for credit and loans and give you access to lower interest rates and loan terms. Beyond that, your credit can even impact your ability to rent an apartment, your employment opportunities, and your insurance rates.
For these reasons and more, it's well worth the time and effort to clean up your credit report and work on increasing your score. If you're ready to open yourself to greater financial opportunities in the future, make sure you check out our Credit Building Tips blog for tons of resources on improving your credit.
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