How Long Does Debt Settlement Affect My Credit Rating?

When a creditor or collection agency offers to let you settle a debt for pennies on the dollar, the prospect can seem too good to be true. Often, that's just the case -- while debt settlement agreements can let you get rid of debt for much less than you owe, your credit rating will pay the price in the long run.

Last-Ditch Effort

Debt settlement, whether offered by your creditor, a collection agency or a so-called credit repair company, is your creditor's parting shot at collecting even a portion of what you owe. Offers to settle your debt for less than what was originally owed are often extended only after other attempts to collect the debt in full have failed. When debt settlement is on the table, it's often because the account is in collections, or because you've stopped making payments.

Long-Ranging Consequences

When you settle a debt for less than you owe, the remainder of the debt may be forgiven, but a record of the debt still exists -- it's there on your credit report for future creditors to see. Debt settlement becomes part of your credit history when your creditor or a collection agency notates your credit report to reflect that you settled the account for less than what was owed. This notation stays on your credit report for seven years.

Damage Already Done

The damage that debt settlement does to your credit report is not just the notation that your debt was settled for less than the amount owed. Because debt settlement is often a worst-case scenario, the damage to your credit report in the form of late payments and failure to make payments is often already done by the time debt settlement becomes an option.

Worst Case Scenario

There's no way that debt settlement is not going to cost you in the long run, even if it does save you a considerable amount of money upfront. The cost is a trashed credit score and years of rebuilding your credit in order to seem like a viable risk to lenders again. Before you agree to a debt settlement, contact a reputable credit counseling agency to see what your other, legitimate options may be.