Paid and Settled Accounts

Negotiating a Settlement Amount on an Account in Good Standing

Dear Experian,

My mother offered to pay off my private student loans. The account is in good standing, but I am negotiating to pay an amount less than the total owed. If there is no negative payment history, but the account shows it was settled for less than the full amount, will this lower my credit score? Again, the account is in good standing, I have always paid - just looking to pay it off now.


Dear MJS,

A settlement on your account will have a negative impact on your credit scores even if there were no previous late payments because you didn't pay the debt in full, as agreed. Failure to pay the debt in full will always be seen as a sign of risk to future lenders.

What Does It Mean to Settle an Account?

When a lender agrees to settle an account, they are agreeing to take a financial loss by accepting less than the full amount that is owed to close out the account. This is considered negative because you did not honor the original contract and pay the debt in full as agreed.

How Will a Settled Account Affect My Credit?

It's generous of your mother to offer to pay off your loans. However, if you choose to settle your account rather than paying back the full amount that you owe, the status of "settled" on the account will reflect negatively on your credit history -- even if you have always made all your payments on time. Settled accounts that were never late remain on the report for seven years from the date they were paid in settlement.

Keep in mind that student loans often report separate accounts for each semester that you attended school. If you have multiple loans appearing as settled on your credit report, the impact may be even greater.

Contact Your Lender if You Are Struggling to Make Payments

If you are having trouble making payments on your loans, consider discussing other options with your lender. While it may seem easier to simply agree on a settlement offer, your lender may be willing to work with you and help you develop a plan to continue making on-time payments.

If possible, consider using the money your mother was going to give you towards the loans to pay down the debt instead. You may then be able to re-finance the remaining balance so that your monthly payments will be lower. Student loans may have even more options available to manage repayment. Ask your student loan company about alternatives to settling the debt. While settling your student loans is better than not paying them at all, doing so will almost certainly hurt your credit.

Having a positive credit history is essential to your future — for everything from obtaining a cell phone or a car loan to qualifying for an apartment or a mortgage. If you can maintain your good payment history, it can save you thousands of dollars in high interest fees later on down the road.

Thanks for asking,
The "Ask Experian" Team