Will Settling a Debt Affect My Credit Score?

Dear JYS,

Yes, settling a debt instead of paying the full amount can affect your credit scores. When you settle an account, its balance is brought to zero, but your credit report will show the account was settled for less than the full amount.

Settling an account instead of paying it in full is considered negative because the creditor agreed to take a loss in accepting less than what it was owed.

Settling an Account Is Better Than Not Paying at All

Although settling an account is considered negative, it won't hurt you as much as not paying at all. And, if you are planning on making a major purchase, such as buying a home, you may be required to either settle or pay in full any outstanding delinquent debts before you can qualify for a loan.

If paying the debt in full is not an option, settling the account is typically more beneficial than letting it go delinquent or, worse, to default.

Settled Accounts Remain on Your Credit Report for Seven Years

When you settle, the account will not be removed immediately from your credit report. If you were late on payments, the account will remain on your credit report for seven years from the original delinquency date.

If the account was positive, meaning there are no late payments in the account history, the account will remain on your report for seven years from the date it was settled.

How to Begin Improving Your Credit Score

If you've had financial troubles in the past, but now you're working to improve your credit, you're on the right track. A good first step is to bring any past due accounts current. More tips for building and maintaining good credit scores include:

• Make all payments on time going forward. Your payment history—whether you make all payments on time—is the most important factor in credit scores. If you are ever in a situation where you may not be able to make a payment on time, you should contact your lender to discuss your options before the account becomes delinquent.
• Reduce balances on revolving accounts. The second most important factor in credit scores is your utilization rate—the amount of credit you're using relative to your overall credit limit. If you tend to carry high balances on your credit cards, reducing that debt load will improve your utilization rate.
• Enroll in Experian Boost^®ø. With Experian Boost, you can sign up to have your positive utility, internet, cable and phone bill payments added to your credit history, which can help your FICO^® Score^☉ . Once you enroll, you'll immediately see an impact.
• Focus on your risk factors. If you haven't already, request your credit score from Experian and pay close attention to the risk factors provided with your score. These factors tell you what you need to do to improve your credit scores.

Thanks for asking,

Jennifer White, Consumer Education Specialist