Paying off your delinquent accounts is commendable and lenders will see your efforts to absolve old account balances when reviewing your credit records. Unfortunately, debt settlement is a negative entry on your credit report. Debt settlement -- and the circumstances surrounding it -- negatively impact your credit rating in a variety of ways.
Late Payments
If your creditor accepts your settlement offer while your account is still current, you will suffer less credit damage than if the creditor refuses to accept a settlement until your account is seriously delinquent. Unfortunately, creditors have little incentive to accept a settlement unless the risk exists that you will not pay the debt at all. Thus, if its a settlement you're after, you'll probably have to let your account fall into default before the creditor will negotiate with you.
The downside to this is that each month when your payment does not arrive, the creditor reports the delinquency to the credit bureaus. Each late payment notation further drives down your credit score. By the time the creditor accepts a settlement -- if it negotiates with you at all -- your credit rating will be considerably less than it was before you stopped making regular payments.
Old Debts
Settling an old debt may make you feel better, but doing so adversely impacts your scores. The more recent an entry is on your credit report, the more effect it has on your credit score. Although paying off an old debt will not hurt you, settling an old debt causes the account trade line on your credit report to update. Because the settlement -- a negative event -- is a recent entry, your credit score suffers as a result of settling old, unpaid debts.
Collection Accounts
Consumers who settle debts with their creditors do so under the assumption that the creditor will forgive the remaining balance they owe. Unfortunately, this does not always occur. Unless you sign a settlement agreement with the company in which the creditor agrees not to sell the remaining debt you owe, it can sell the post-settlement balance to a collection agency. Collection accounts on your credit report are inherently derogatory. If you settle a debt and your creditor sends the remaining balance to a collection agency, the resulting collection account on your credit report will lower your credit score.
Impact Over Time
Because the amount of time since a creditor reported a negative entry is a factor that helps determine your credit score, your score will gradually increase as time passes after a debt settlement. According to the Fair Credit Reporting Act, all delinquent or settled commercial debts you owe will vanish from your credit history after seven years and 180 days. Once the settlement no longer appears on your credit report, it can no longer adversely affect your scores.
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