How Does "Settled for Less" Affect Your Credit?

Settling an account may give you temporary relief from a debt problem, but you could have a longer, more serious problem: bad credit. However, it usually is not the notation of a settled account that affects your credit but the events leading up to it. You need to take action early to prevent an account from turning toxic to your credit score.

Identification

In pure numbers, settling an account takes 45 to 65 points off of a FICO credit score of 680, according to Ellen Cannon of Bankrate. Negative items harm credit scores more as a person's score rises. For example, for a person with a credit score of 780, a settled account on their credit history damages their FICO rating 105 to 125 points.

Considerations

The reporting of a settled account usually does far less damage than 45 points. Creditors rarely settle an account until you have missed several payments. A payment late by three months takes 70 to 135 points off of a FICO score and is almost as bad as a bankruptcy--not counting other accounts on which you may have defaulted. Thus, by the time the creditor settles your account, your credit score already likely is trashed.

Credit Reporting Time Limit

Any missed payments and settled accounts stay on your credit report for seven years and 180 days after the date of initial delinquency. The date of initial delinquency is the first time you miss a payment leading up to the charge off. This is different from the date of last activity. The date of last activity can change, such as when a creditor sells an account to a collection agency, without affecting the federal credit reporting time limit.

Tip

Find a credit counselor, preferably from a non-profit organization such as the National Foundation for Credit Counseling, to help you weigh your options on the defaulted account. Settling an account, for instance, may be better for your credit than filing for bankruptcy but not as ideal for your credit score as paying it in full. The creditor, for instance, may delay payments on the account and make other concessions that let the creditor report as current, if you repay the entire debt.