Does Paying a Settlement on a Collection Affect My Credit Score?

Any time an account enters collections or is listed as in collections, your credit score will be impacted. The actual numeric amount of that impact will vary based on the age, type and status of the collections account. While a settled account may impact your score less than one that is in active collections, it is still considered a negative and will potentially damage your score. Having any type of collections accounts on your report may negatively affect your ability to receive credit or raise the fees you'll pay for car and home insurance.

What Is a Settlement

When you have an account in collections, you have several options. You can pay the amount in full, ignore it completely or negotiate a settlement amount. A settlement amount is a figure that both parties agree on. As the debtor, you will pay this amount to the collections agency or creditor. It agrees to accept this amount as payment in full for the account. The account is then listed on your credit report as a "settled" collections account.

Settlements and Scores

A settlement may save you some cash, but it can actually damage your credit score. Two things happen when you pay a settlement: the account re-ages on your credit report, making it seem newer than it may be, and the account lists as a settled collection. Both of these issues can harm your credit. If you settle on an item that is over five years in age, you can actually lower your credit score, since this new activity will re-age the account, and make it look like a new collection. A collection account that is listed as "settled" will likely not improve your score, though a mortgage or auto lender may require you to settle any outstanding accounts before approving a loan.

Negotiating a Settlement

If you decide to negotiate a settlement with a creditor, you need to know the original amount due and what fees have been added. If the account has been purchased by a junk debt buyer, it may have added hundreds or thousands of dollars onto the account amount. Ignore these added fees and offer a settlement based only on the amount you owed the original creditor. Never give a creditor or collections agency access to your checking account; it could take out more money than you agreed to pay.

Pay for Deletion

The best way to pay for a debt and improve your credit score is to pay the collections agency or creditor only if they agree to delete the account from your report entirely. According to financial expert Dave Ramsey, you should always insist that the creditor delete the account from your credit report entirely before you agree to pay it. True deletion is the only way to prevent a collections account, even a settled one, from harming your score.