If you were recently in over your head with debt, you may have negotiated a debt settlement with your creditors. That likely provided much-needed financial relief. But now, you might be wondering how that settlement affected your credit score — and how long it will stay on your credit report. Here’s what you need to know.
Exploring Debt Settlement
You might be able to negotiate debt settlement on your own or with the help of a debt relief attorney. If you secure a debt settlement, it means the original creditor or debt collector has agreed to accept less than the full balance of what you owe as payment. This usually only happens if the creditor is sure that they can’t collect the full balance from you. If you have missed many payments in a row and your account is behind and in collections, the creditor may be willing to accept a settlement versus nothing at all.
Credit reporting agencies and creditors may report this on your credit report. It could potentially be negative because you paid less than what the original contract stated. Still, debt settlement is better than an account that’s past due.
How Long Does Debt Settlement Stay on Your Credit Report?
Once you settle a debt, your credit report shows that the account balance is now $0. In addition, your report will note that the account was settled for less than the full amount. The debt settlement itself doesn’t affect your credit, but the result of paying less than what you owed or settling for less than the total balance could show up as a negative entry on your credit report. (Once the settlement is complete, it’s a good idea to check your credit reports and make sure it was reported accurately.)
So, how long does debt settlement stay on your credit report? If there are no delinquencies leading up to the settlement date, it stays on your credit report for seven years from the date the account was reported as settled. More likely, however, you had a string of late or missing payments leading up to the settlement. Those will also be noted on your credit report (and, unfortunately, bring down your score even more). The settlement will remain on your credit report for seven years from the date the account first became delinquent. This is known as the original delinquency date.
Can You Remove a Settlement From Your Credit?
Once you have a settled debt on your credit reports, you cannot do much about it. The Fair Credit Reporting Actrequires creditors to report information accurately. So your best move is to simply wait it out and give it some time.
It’s a good idea to keep records of your settlement, so you know exactly when your seven years are up. Plus, if a creditor or debt collector tries to falsely re-age your account — as in, make it seem like the delinquency is more recent than it really is — you have the proof that they’re breaking debt collection laws.
While settling your debt can have a short-term negative impact on your credit. it helps you in the long run. Getting that debt off your plate means you don’t have to worry about missing payments in the future. Missing payments can be much worse for your credit score. You’ll also lower the total debt you owe — another win for your credit.
How Long Does It Take to Rebuild Credit After Debt Settlement?
Fixing your credit after a debt settlement takes time. However, if you use a professional for the debt settlement process, you might see your score go up faster than you expected. Exactly how much time depends on a few factors, including what condition your credit was in before the settlement, how quickly you paid off the debt, and sometimes, who negotiated it. If you have an otherwise strong credit history and other loans currently in good standing, your score may begin improving within a few months.
On the other hand, if you have poor credit or a thin credit file, it could take much longer to see improvement.
Good news: Debt settlement has a better outcome for your credit than a charge-off or going to collections. So while you wait for that settlement to eventually drop off your credit report, here are some other ways you can work on improving your credit in the meantime:
- Stay current on all your bills. Payment history is the most important credit factor. It makes up 35% of your score. Just one late payment can cause your score to drop quite a bit. That means making your bill payments on time and in full is the best thing you can do to build good credit.
- Pay down existing debt. “Amounts owed” is another important credit score factor. It’s also known as your credit utilization ratio. It measures how much income goes toward paying back debt each month. The lower your credit utilization, the better, since it shows you aren’t overly reliant on credit. So if you have some outstanding debt, work on paying that down to improve your credit score. Credit cards (known as “revolving credit”) have more impact than installment loans (such as student loans, auto loans, etc.).
- Avoid applying for new credit. Every time you apply for a credit card or loan, the lender pulls a copy of your credit report. This results in a “hard credit inquiry.” One hard inquiry now and then has little to no impact on your credit score. However, if you have several inquiries within a short period, it can cause your score to drop. Hard credit inquiries stay on your report for two years, though their impact lessens with time. If you’re trying to improve your credit, avoid applying for new debts when possible.
- Review your credit reports for errors. One or more of your credit reports can contain an error. For instance, an account belonging to someone with a similar name could appear on your report. Or you could have an account reported twice. It’s a good idea to review your reports regularly and make sure there aren’t mistakes that could bring your score down. You can get a free copy from each of the three major credit bureaus (Experian, Equifax, and TransUnion) by visiting annualcreditreport.com. If you find an error, dispute it with the bureau reporting it. You can easily submit a dispute online.
Settling a debt can have consequences for your credit. Even so, it’s a much better outcome than continuing to miss payments, owing creditors thousands of dollars, dealing with calls from debt collectors, and potentially facing a lawsuit for not paying your debt. Talk to an experienced debt relief attorney to learn how settling your debt impacts your credit score and finances today. An experienced debt settlement attorney can walk you through your options in resolving your debt in the best possible way with the least impact. Call our offices at (866) 890-7337 or fill out our short contact form for a free consultation. Your information is never shared.