Settling a debt has a major impact on your credit. In fact, you might find that your score went down after a debt settlement. So is it possible to have that settled account removed from your credit report?
Below, we’ll look more closely at how debt settlement affects your credit and how to remove settled accounts from credit reports.
What Is a Settled Account?
When you settle an account, you pay off a debt for less than what you owe. Usually, this occurs after you’ve been behind on your payments for some time. A debt could be settled with the original creditor or with a third-party debt buyer if the original debt was sold off.
But why would any credit card company or lender agree to accept less than the full amount you owe? Attempting to collect credit card debt costs the company time and resources. It’s especially expensive if the creditor or debt collector sues you in court. Plus, if your finances are in bad shape, there’s a chance you could file for bankruptcy, and the creditor may end up getting nothing at all.
Debt settlement can be attractive if your lender believes they won’t see any money otherwise. However, it does require skillful negotiation to strike a deal that is attractive for the creditor and makes sense for your budget. Some people can handle this on their own. But many find the process too time-consuming, difficult, and/or stressful. That’s why many borrowers decide to work with debt settlement companies or attorneys who can negotiate a deal on their behalf.
In fact, working with an attorney who is experienced with debt settlement can ensure that you receive the best offer possible as quickly as possible. Unlike many debt settlement companies, attorneys are ethically bound to put your best interests first.
Does Debt Settlement Lead to Bad Credit?
You might think there couldn’t possibly be a downside to getting out of debt for a fraction of what you owe. Often, it is the best course of action for people with an overwhelming amount of debt. However, it’s not without downsides. There are short-term consequences for your credit and FICO score, which could make obtaining new credit more difficult.
When you settle a debt, the account gets updated on your credit report. It will show that you no longer owe the debt, but that it was settled for less than you owed rather than “paid in full.“ This is considered a negative item on your report.
You also probably had several late payments or missed payments leading up to the settlement. Payment history is the most important credit factor, making up 35% of your score. So those missed payments will have also caused your credit score to drop considerably prior to the debt settlement.
A debt settlement will stay in your credit history for seven years from when your account first became delinquent (i.e., the original delinquency date). If you didn’t have a delinquent account before the settlement, the debt settlement will remain on your credit report for seven years from when the account was reported settled.
The good news is that while your credit might take a hit initially, the impact lessens over time.
Plus, debt settlement is less harmful to your credit than a charge-off, letting a collection account sit as unpaid debt, or filing for bankruptcy. In fact, it should help your credit in the long run — you’ll decrease the total amount of debt you owe and stop missing payments.
How to Remove Settled Accounts From Credit Report
If you have a debt settlement noted on your credit report, you might wonder if you can remove that entry. Unfortunately, the answer is no in most cases. According to the Fair Credit Reporting Act, creditors are required to report information accurately. So if the information on your report is negative — but correct — the best course of action is to be patient and give it time.
Be sure to keep a record of your settlement, though. You’ll want to know when those seven years are up so you can verify your credit reports have been updated. You’ll also want to have proof of your settlement date, just in case the creditor or collection agency tries to falsely re-age your account (make it seem like the delinquency is more recent than it really is). That’s a violation of debt collection laws, in which case you should consult a debt relief attorney.
Does “Pay-for-Delete” Work?
You may have encountered something called “pay-for-delete” when looking for ways to remove negative information from your credit. This is a strategy touted by many credit repair companies. It works like this: You offer to pay a higher settlement amount, and in exchange, the creditor agrees to remove the account from your report. This allows you to avoid the negative impact of a debt settlement on your credit.
The problem? Creditors are not obligated to remove correct information from credit reports. In truth, they’re legally required to report it. So don’t expect any major lender or creditor to agree to this type of arrangement. Instead of hoping that a pay-for-delete will solve your credit issues, it’s better to focus on practicing good financial habits now and waiting for your credit to improve gradually over time.
Removing a Credit Report Error
On the other hand, if inaccurate information on your credit report is causing your score to drop, you should have it fixed immediately. Credit report errors are more common than you might think: A Consumer Reports investigation found that more than one-third (34%) of Americans found at least one error on their credit report.
If you find inaccuracies on your credit report, dispute that information directly with each major credit bureau (Experian, Equifax, and/or Transunion). Generally, you’ll need to provide:
- Your contact information
- A detailed description of the mistake
- An explanation as to why you’re disputing that information
- A copy of the section of your credit report that contains the info you’re disputing
If you send your dispute by mail, be sure to use certified mail and ask for a return receipt. Again, it’s important to keep records.
Disputing credit report errors with credit reporting agencies online may be more convenient. The links for doing so are:
You can get a free copy of your credit report from each of these agencies by visiting annualcreditreport.com.
Work With a Legal Expert on Debt Settlement
Navigating debt settlement and its impact on your credit can be tricky. That’s why it’s a good idea to at least consult with an attorney before taking any major steps. Hiring someone to settle a debt for you may lead to better results and easier repayment. Or you might discover that there’s a better course of action. Tayne Law can help. We offer a free consultation to learn your options and familiarize you with our operations. Call us at (866) 890-7337 or fill out our short contact form. There’s no obligation, and we never share your information.
FAQs
Settling a debt can help avoid more serious consequences like a lawsuit. Also, settling a debt usually means paying less than what you originally owed. Debt settlement can bring peace of mind knowing that you have one less debt to worry about.
Settled accounts typically stay on your credit file for seven years from the date of the first delinquency. This includes student loan debt, car loans, credit card accounts, and other types of debt that have been settled for less than the full amount. After this seven-year period, the settled account should automatically fall off your credit report.
Accurate information, such as a settled debt, generally can’t be removed from your credit report until the reporting period ends. This period lasts for seven years from the date the account first became delinquent. You can dispute an error with the credit bureau if you think there’s an error.
