A debt settlement is an agreement between you and your creditor to pay off an account for less than is owed. This is a money-saving maneuver, but it can also significantly damage your credit. The total effect a debt settlement can have on your credit report depends on multiple factors including the original length of your account delinquency and the status of your other credit accounts.
Damage To Your Credit
A notation of a debt settlement on your credit report can have an effect on your credit score as severe as an account included in a bankruptcy, according to financial information website, Bankrate. This may make it difficult for you to secure new lines of credit including personal loans and credit cards. When you are offered new credit opportunities you may be required to pay introductory fees, place a down payment on the account or agree to a high interest rate.
Subtext of a Settlement
A debt settlement is so significant a notation on your credit report because of its subtext for a potential creditor. The presence of a debt settlement indicates that you have been irresponsible with credit in the past because you allowed an account to become delinquent to the point your previous creditor offered you the settlement. Any negative payment history, including your creditor's original charge-off of your account, may also remain on your credit report even after the debt is settled. This may include the original credit delinquency along with evidence of collection practices.
Time on Your Credit Report
Your credit card company may continue to report your debt settlement to all major credit bureaus for between seven and 10 years, depending on the laws in the state where you live. According to Bankrate's credit card advice columnist Leslie McFadden, the most recent of the most severe negative marks on your credit report damages your credit score the most. The damage to your credit score lessens the further away you get from the original notation in your credit report, as long as you don't incur new credit problems, such as additional delinquent accounts.
Credit Damage is Relative
How much a debt settlement harms your credit is relative to other accounts present on your credit report. If there are several other delinquent accounts present on your credit report, a debt settlement will actually have less of an impact on your overall score than if you have a pristine report with the debt settlement as your lone negative notation. At a certain point, there's only so much damage another negative notation on your credit report can do.
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