Does Settling With Debt Collectors Affect My Credit Score?

Debt collectors sometimes try to pressure consumers into settling an account by claiming that doing so will improve their credit rating, and this may be true -- somewhat. A settled collection account probably does not improve your score as much as you think, or it may lower your credit score. In some cases, settling a collection account is unnecessary and has a null effect on your credit rating.

Effect

The status of a collection account does not matter in the FICO scoring system. Settling any account damages your credit rating a few points, but the real damage is done by the presence of the collection account. Settling a collection account counteracts some of the damage from settled debt because it eliminates debt from your credit history. The amount of debt you owe is 30 percent of your FICO credit rating, so settling a collection account with an unpaid balance of thousands of dollars can boost your score dozens of points.

Considerations

Even though a collection account may have a marginal effect on your credit rating, settling an account can help your chances at a loan approval. Lenders do not always look at just your credit history with a FICO score calculation. It may make informal judgments about data on your report. If the banks sees a paid collection account, it may consider that an honorable deed that outweighs a poor credit score, according to MSN Money.

Considerations

A collection account only stays on your credit history for seven years, but does less and less damage each year. However, it looks better if you paid off a collection account years ago than you settled a collection account a few months ago, because settling an account right before an application appears as though you only agreed to settle to get a loan.

Tip

Pull a credit report on yourself from AnnualCreditReport.com. You can run a report from Experian, Equifax and TransUnion once a year for free. Look for the collection account. If it is older than seven years, the credit bureaus cannot report the debt, so paying on it does not help your credit rating. If the debt is seven years or older, you probably do not have to legally pay it anyway, because the statute of limitations likely passed as long as you haven't made any payments in the last seven years.