Will Credit Card Companies Settle for Less Without Hurting My Credit?

When a person owes a significant amount of money to a credit card company and becomes late in paying the debt back, he has several options. First, he can pay back the money he owes. Second, he can allow the debt to remain delinquent and face the potential of legal action from the creditor. Or, third, he can attempt to settle the debt with the company. In the event of a debt settlement, his credit score will likely suffer severe harm.

Debt Settlement

When a person settles a debt for less than the full amount owed on the debt, this settlement is usually reported to one or more credit reporting agencies. These agencies use information about a person's history of lending to give him a credit score. If the original loan was reported to a credit reporting agency, then the disposition of that loan will also be recorded on the report. Settlements are noted in these reports under each individual debt.

Effects on Credit Score

The settlement of a debt, although it will generally save the borrower money, is considered a negative event by credit reporting agencies, as the lenders who issued the settled debts were not paid back in full. When a person fails to pay back a loan in full, even if it is with the consent of the lender, credit reporting agencies view the borrower as at greater risk of defaulting, leading them to downgrade his score.

Reporting Settlement

When a settlement is noted on a credit report, the debt that has been settled is labeled with a notation like "partial payment accepted" or "settlement." However, this notation will only appear if the credit card company that settled the debt reports the debt as settled to the credit reporting agency. Technically, a credit card company has no obligation to report the debt as "settled" to the credit reporting agency; instead, it could report the disposition of the debt in a way that is more favorable to the borrower's credit rating.

Solution

When negotiating a settlement with a credit card company, a borrower may make one of the conditions of the settlement that the company report the debt as "paid in full" to the credit reporting agency. When a delinquent debt is reported as "paid in full" instead of "settled," much less harm is done to the individual's credit score. While some credit card companies will be willing to do this, others will not.