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What Does Debt Settlement Do To My Credit Report?

When you have delinquent accounts and collections on your credit report, you usually aren’t left with very many options. You can pay the account in full. In most cases, this isn’t possible. If you were able to part with the full amount of the debt then you more than likely would have paid it months ago. Another option is to ignore the debt. After a period of time the creditor will mark the account as charged off and in another 7 years it will be erased from your credit report. In the meantime, you will continue to be denied for credit because of this negative mark on your credit. More and more people are choosing debt settlement as an alternative to the previous options.

Debt settlement is when you make an agreement with the lender to only pay a certain amount of the debt. The amount that you pay is negotiated between you and the lender. This amount is usually the amount that you would have paid on the debt if you had not been charged interest. The lender may extend you the opportunity to pay the debt in three payments or as a lump sum payment.

Sounds good, right? The lender offers you the opportunity to pay a lower price for the debt and your credit is completely restored. Contrary to what many people believe, this isn’t exactly how debt settlement works. The creditor will update your credit report to reflect that you have paid the account and also include that you paid less than the amount that was initially agreed. When you make credit applications in the future, creditors will see this information as a sign that they will not make any money if they extend credit to you.

Even though debt settlement is slightly better than a charged off account, it is still not the best option. It will continue to show up as a negative account on your credit report which will, in turn, affect your overall credit score.

There are different stages of account listings that the credit may choose to apply to your account. Some of these are worse than others. After debt settlement, most creditors will list your account as “Paid Charge-Off” or “Paid Was Late”. When the creditor puts this listing on your account, it is almost just as bad as not paying the account at all.

Another options for account listing is “Settled”. While it is not as bad as Paid-Off, Settled is still harmful as you can continue to be denied for credit because of this fact.

“Paid” is one of best account listings that you can receive after a debt settlement. This listing does not have any negative or positive implications on your credit report or score. However, if a Paid status is accompanied by other information such as “Paid Repossession” or “Collection”, it will have negative affects.

Debt settlement isn’t as good for your credit report as you first may think. Even though you no longer have to worry about letters and phone calls from collectors, your credit report will continue to contain negative information. In addition, your purchasing power will be greatly limited with this information on your credit report. You could end up spending more money in utility deposits and interest rates. In some cases you could be denied for applications that are made on the basis of credit, this includes employment and leases.

The key to using debt settlement is working something out with the creditor that will help your credit report. Prior to make a settlement offer with the creditor ask for the item to be deleted from your credit report. Many creditors will agree to this, as they do not have any reason to keep the information on your credit report once they have been paid. In some cases, creditors will not agree to delete the information from your credit report. If this happens, negotiate for an account listing that will not negatively affect your credit. For example, a “Paid” only listing will not hurt your credit.

When you make an agreement with the creditor make sure to get all terms of the agreement in writing. This includes the amount you pay as well as the negotiated credit listing.

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