A person's credit score -- the measure of the likelihood that he will pay back a loan -- is determined using information contained in his credit report. This report includes records of loans and lines of credit that the person has taken out, as well as his record of paying these loans back. When a person settles a debt with a creditor, the settlement is typically listed on his credit report for the next seven years.
Credit Reports
Credit reports are compiled using information reported by lenders to credit reporting agencies. This includes both loans that a person has taken out and any changes in status to these loans, such as repayments, delinquencies and settlements. When a loan is settled for less than the amount originally agreed to, the lender will report the settlement amount to credit reporting agencies. The settlement of a debt is considered negative information and may harm a person's credit score.
Settlement
Although a settlement may be looked on more favorably by a credit reporting agency than an outstanding debt, it will still negatively affect a person's credit score when compared to the score the person would have received for paying off the debt in full. According to U.S. law, credit reporting agencies are allowed to keep negative information on a person's credit report for a maximum of seven years from the date the information was added.
Types of Listings
A debt settlement can be listed on a credit report in a number of ways. In most cases, the lender will report that a portion of the debt was written off -- this write-off of debt is what pulls down an individual's credit score. However, the lender does not have to report the settlement in this manner. To preserve their credit scores, some debtors will request that the lender report the debt to the reporting agency as paid in full, which will harm an individual's credit score less.
Considerations
The exact formula that a credit reporting agency uses to determine a person's credit score is proprietary information that is not shared with the general public. Some credit reporting agencies may choose to remove a person's debt settlement from the credit report before the full seven years have elapsed, as the information is no longer considered relevant. If the information remains on a person's credit report after seven years, the individual can petition the agency to have it removed.
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