Does Making a Settlement of Less Value Than a Person Owes Harm a Person's Credit Score?

Debt settlement may stop dunning calls from creditors and collection agencies, but it also reflects badly on your credit score. The Equifax, Experian and TransUnion credit bureaus show that you made a settlement rather than payment in full, which is a negative status. Sometimes you can negate the negative credit score effect if you negotiate the settlement to include the account's credit-reporting status.

Definition

A settlement is an agreement between you and a creditor that allows you to pay less than the full amount owed. The company agrees to accept this sum as payment and full, and it ceases collection efforts. The settlement is reported to the Equifax, Experian and TransUnion credit bureaus, which add an appropriate notice to your three credit reports. Settlements are part of your payment history, which is 35 percent of your total credit score, according to FICO, the major scoring firm. Your score drops because settlements are viewed negatively, since they show you did not pay all that you owed on the bill.

Negotiation

Debt settlement terms are negotiable, so you can often convince your creditor to change the account status in your Equifax, Experian and TransUnion files in exchange for your payment, as well as reducing the original owed amount. The creditor's main interest is getting some money from you, according to Bankrate.com columnist Steve Bucci, so it is usually open to altering the way it reports your account if that is what it takes to get you to pay. Insist on "paid as agreed" status, with no indication that you paid less than the full balance, and get a written copy of the agreement before completing the settlement.

Considerations

Always get credit report copies after making a debt settlement agreement that includes a reporting status change. Equifax, Experian and TransUnion must give you free reports once every year under the Fair and Accurate Credit Transactions Act, the Privacy Rights Clearinghouse explains. Use AnnualCreditReport.com to place your orders. Complain to the creditor if your reports still show the account as open and delinquent or reflect a settlement instead of the agreed-on positive status.

Time Frame

A negatively reported settlement does not stay on your three credit reports forever. It gets wiped out in seven years, along with most other negative data, the Federal Trade Commission explains. Outdated data loses all credit score impact as soon as the bureaus erase it. Your credit score rises whenever negative information gets removed from your reports.