My Credit Score Dropped After Settling an Account

Your credit score can take a plunge after you settle an account for a variety of reasons. How many points you lose can depend on the age and the type of debt. Settling on a mortgage debt such as a foreclosure will hurt your score far more than settling on a small medical bill, even if the debts were incurred at the same time. While settling is generally considered to be a good idea, doing it at the right time will minimize the damage to your credit score.

About Settlement

When you settle a debt, you come to an agreement with a creditor. The creditor agrees to accept a lesser payment than is due, and you agree to pay a lump sum. Depending on the type of debt, you could settle an account with a credit card, car company, mortgage lender or collector. While settling a debt can put an end to collections efforts, it can affect your credit rating.

Account Re-Aging

The older a credit account is, the less it affects your credit score. If you have a credit account several years old in collections, late or charged off, it is likely not hurting your score much. Old accounts drop off your credit report in seven years, so the closer the debt is to the seven-year mark, the less likely it will hurt your score. Making a payment of any type, including a settlement, will reset the clock, making this a new collection account, and possibly damaging your score. Proceed with caution if you are planning to settle an old debt.

Settlement Reporting

The way a settlement is reported can affect your score. If it is simply removed from your credit report, you should see an increase in your credit score, not a deficit. If the account is listed as in collections, it can hurt your score, even if you pay it. If it is listed as a settled collection, it still counts as a collection and has a potentially negative effect. If your credit report shows you settled and paid a lesser amount, that can negatively affect your score as well.

Fixing your Score

Two things can be done to fix your score. Simply allowing time to pass will ease the impact the settlement has on your score. Beyond this, contact the debt agency or creditor and ask them to remove the account from your report. Unless you have negotiated it before paying, the collections agency is not required to remove the debt listing, but it won't hurt to ask.