Will It Lower My Credit Score If I Take a Settlement Offer From a Creditor?

Your credit score distills your borrowing and bill payment performance into a three-digit number that tells lenders if you are a good risk for new accounts. Late payments pull this score down, but MSN Money writer Liz Pulliam Weston advises that creditors sometimes offer settlements on delinquent accounts. You may be able to salvage your credit score by accepting a settlement if you know how to bargain.

Credit Score Factors

Your credit score comes from credit report information on current and past loans and accounts, payment status and money owed, according to MSN Money. Your Experian, Equifax and TransUnion reports also reflect settlements with creditors for late or charged-off accounts. Settlements are considered negative and hurt your score even though you paid off the account for a mutually agreed-upon amount. Other lenders still see you as a credit risk because you did not fulfill your original contract or pay the full amount owed.

Solution

Creditors control the data they report to the credit bureaus so you can negotiate to fix your credit score as part of your settlement. The score goes up if the negative account information gets removed or changed to something more positive. For example, you can ask for total erasure or a "paid as agreed" status instead of a paid settlement, Bankrate.com "Debt Adviser" Steve Bucci says. Creditors often agree if that is what it takes to get money from you.

Time Frame

Creditors for unsecured accounts like credit cards generally offer settlements after several months of skipped payments. You will get collection calls, so let account representative bring up the subject of a settlement. Request positive credit reporting as a payment condition if you want to accept the offer. You may be able to settle even if the account gets written off, which usually happens within six months, or if a debt collector buys it. The credit report entry, including the fact that the account was settled, disappears completely and stops affecting your credit score after seven years from the original delinquency date if the creditor refuses to erase it beforehand.

Considerations

Creditors sometimes make errors when they report settlements to Experian, Equifax and TransUnion. For example, the creditor name, settlement date or amount might be inaccurate, which opens an opportunity to potentially raise your credit score. The Federal Trade Commission explains that everyone is legally entitled to dispute credit report mistakes. The bureaus usually try to confirm the data with the creditor. They must erase the settlement entry if they get no response or inadequate confirmation after 30 days.