When a person finds himself with unmanageable debt, he will often choose to negotiate a settlement with his creditors rather than pay the full amount he owes. This will accomplish two things. First, it will keep the debt from growing and protect the creditor from additional collection actions. Secondly, it will stem the damage to his credit rating. However, settlements do generally negatively affect a person's credit report. According to U.S. law, settlements can remain on a report for up to seven years.
Credit Scores
A FICO score -- a measure of an individual's worthiness to receive credit, as measured by credit reporting agencies -- is calculated using information contained within an individual's own credit report. This report will contain records of all the loans that an individual has taken out, as well as how the individual paid them back. A failure to pay back a loan in a timely fashion will count against the individual and lower his score.
Settlements
Outstanding debts, particularly delinquent debts, pull down an individual's credit score. Settling these debts can often help improve a score by eliminating outstanding debts. However, any time an individual settles a loan for less than the amount he originally owed, a credit reporting agency will consider this to be a sign that the individual is at increased risk of defaulting on a loan and will lower his score accordingly; precisely how much it will be lowered will depend on the rest of his credit history and the amount written off by the lender.
Length of Time
According to U.S. law, negative information on an individual's credit report can only stay on the report for a maximum of seven years before it must be removed. This includes reports of debt settlements. Once a settlement has been removed from a credit report, it can longer affect a person's score. The only exception to this law is bankruptcies -- a variety of settlement -- which can be listed for up to 10 years.
Options
Although the presence of a settlement will hurt a person's credit score, a creditor is under no obligation to report a settled debt as a settlement to a credit reporting agency. In fact, a creditor could, if he chose, report the debt to the credit reporting agency as paid in full. This would help preserve the debtor's credit rating. As part of the debt settlement, some debtors demand that creditors report the settled debt as paid in full.
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