Sep
10
2013

Settling accounts will hurt credit scores

Dear Experian,

I have an unsecured loan of $10,000 and the loan company has offered me a settlement of $5,000. It I take this settlement, will it affect my credit score?

- TPF

 

Dear TPF,

Settling an account will negatively affect your credit score, for a simple reason.

When you took out the loan, you agreed to repay the $10,000 in full, by a specified date. If you settle the account for $5,000 you will repay only half of the debt. That breaks the agreement you made with the original creditor.

Failing to fulfill the contractual agreement with the lender is an indicator of increased credit risk. That will impact your credit scores.

Think about someone borrowing money from you. If you loaned the person $10 but they only repaid $5, would you lend money to them without being at least a little concerned that they might not pay you back the next time they asked?

In very simple terms, that is what settling an account causes lenders to feel when you ask to borrow money again. They have to be concerned that you didn’t pay the whole debt last time, so you might not this time, either. That risk is reflected in credit scores.

However, if you are missing payments and failing to pay the account, you score will be negatively impacted by those delinquencies. Settling may be a way to resolve the debt, but neither missed payments nor settled debts are good for your credit risk.

Thanks for asking.

- The “Ask Experian” team

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