Credit Card Settlement Effects on a Credit Score

When credit card accounts are delinquent, debtors may have the option to reach settlements with their credit card companies for less than the amount due. The effect such action has on a credit score is generally negative, but varies from creditor to creditor.

Considerations

Any notations on a credit report that indicate a creditor took a loss on an outstanding debt is viewed as a negative item. Barry Paperno, chief operations officer at FICO, the company that provides credit scores, advises that settlements are viewed on par with repossessions and bankruptcies when computing a credit score.

Time Frame

Terminology varies, but creditors note in specific terms that a credit account with them is closed but was settled for less than the amount due. Future potential creditors can read this on a credit history as long as these accounts remain on the credit report--usually 7 years, or 10 in the case of bankruptcies.

Misconceptions

Just because a creditor has agreed to a settlement, the negative history with that creditor does not go away once the account is closed. Notes are added to the report indicating a zero balance and account closure, but all negative history still remains on the report.