Different debt reduction and elimination strategies are available to you at any given time, including debt settlement. In debt settlement, you cut a deal with your credit card company so that you pay less than what you originally owe. In some cases, this can reduce your debt on a credit card by up to 50 percent, with some rare instances producing reductions of up to 80 percent. Unfortunately, settlement goes onto your credit report and doesn't come off immediately.
Standard Length of Inclusion
In general, any negative information on your credit report stays there for seven years. This includes both collections and charge-offs. A collection means the credit card company has transferred your debt to a third-party agency that will try more aggressively to get you to pay what you owe. It shows your account has reached the point of serious delinquency and that, in some cases, the creditor and the collection agency had to resort to legal action to get their money. A charge-off means that the credit card company has declared some or all of your debt unlikely to be collected -- you still are obligated to pay the debt, but the creditor acknowledges you probably won't pay. It is closely tied to settlement in that the charge-off amount usually ends up being the amount your creditor subtracts from your due balance in the settlement.
Judgments and Lawsuits
The seven-year rule for negative information on a credit report applies to judgments and lawsuits related to credit cards. However, the law also allows negative information related to judgments and lawsuits to remain on your credit report through the statute of limitations, if the statute extends beyond seven years in your state. If your credit card company settles with you in court, the settlement may remain on your credit report longer than seven years, depending on the laws for your jurisdiction and whether the credit card company is still trying to collect from you at the end of the initial seven years.
Bankruptcy
Bankruptcy can stay on your credit report for up to 10 years, depending on the type of bankruptcy you file. If your deal with a creditor is part of a bankruptcy judgment, the bankruptcy will stay on your credit report longer than the basic charge-off indication.
Closed Accounts
When you settle a credit card account, your credit card company may opt to close your account. A closed account may remain on your credit report up to 10 years, similar to bankruptcy.
Significance
Cutting a deal with a credit card company typically reduces your credit score by 20 to 50 percent. Your lowered score, along with the indication of the charge-off, alert both current and future lenders and creditors you are a greater financial risk. Current creditors may increase your interest rates or opt to close your accounts as a result. This makes it harder for you to pay your debts. It also decreases your debt utilization ratio, which is the amount of credit you're using divided by the amount of credit you have available. This further decreases your credit score. Future lenders and creditors may deny your credit applications. For these reasons, if you have a settlement on your credit report, you should do all you can to clean up the rest of the report and raise your credit score. Be ruthless about paying on time and contacting creditors and credit bureaus about mistakes on your report.
Considerations
The seven-year rule for negative information on credit reports is the maximum allowed time. If the credit reporting agency doesn't feel the settlement is relevant anymore based on the way they collect data, they may let it drop from your credit report prior to the seven-year mark. Additionally, you can ask your creditor to upgrade the status of your account. For example, instead of reporting the account as "settled," they may note the account as "paid." This will make the settlement dig into your credit score a little less. Lastly, many creditors and lenders consider you financially "rehabilitated" if you have at least two years of high re-established credit, as indicated by Next Advisor.
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