What Does it Say on Your Credit Report When You Make a Settlement?

Debt settlement allows you to resolve a delinquent account by paying less than the full amount owed. After the payment, your account is updated to show that it has been "settled" or "settled for less than the full balance." Both terms mean the same, but "paid in full" is used to indicate an account whose entire balance was paid.

Impact on Credit

Settling a credit account will get debt collectors off your back but don't look for a spike in your credit score. Experian, one of the major credit reporting bureaus, reports that any update to your credit report that is less than "paid in full" or "paid as agreed" is considered a negative and could cause your score to drop or remain the same if your credit is already bad. However, the agency acknowledges that some people struggling with excessive debt may have no choice but to seek settlements as they prepare to recover from credit mistakes.

Credit Repair

Information regarding a settlement will remain on your credit report for seven years, but the impact will lessen over time. A bunch of fresh new settlements---or even one---could make it impossible for you to qualify for credit at competitive interest rates over the short-term. However, Experian reports that you really shouldn't be taking on new debt while you are settling accounts and getting your budget under control. Instead you should focus less on your credit score and more on sound financial fundamentals. Paying all your bills on time while reducing debt is the fastest path to increasing your credit score and offsetting the presence of a settlement on your credit report.

Building Confidence

Having accounts on your credit report marked as "settled" or "settled for less than the full balance" can be helpful in some ways as potential creditors review your report. For example, a potential landlord could see the settlements as a clear indication that you are starting to clean things up after a job loss and a foreclosure. The settlements may indicate that you're on the rebound after getting through your financial crisis, and convince the landlord to approve you for a lease agreement.

Negotiating Settlements

The credit reporting agencies list your account information as it is provided by creditors, debt collection agencies and public records such as bankruptcy and foreclosure information. During a debt settlement negotiation, you can ask the creditor or debt collector to delete your old, delinquent account from the credit report instead of marking it as settled. The process is known as "pay-for-delete," but creditors are under no obligation to participate.