How Long Does Settled Debt Stay on Your Credit Report?

Settling a debt might save you thousands of dollars on an account now, but it could cost you much more on future loans because it sticks to your report for years. However, most debts that get to the point that the creditor accepts a partial payment do not usually affect a credit score much, because of the likely numerous defaulted payments before the settlement.

Identification

Settled debts can stay on a credit report for up to 7.5 point years. The clock on the federal credit reporting time limit starts with the date of first major delinquency -- the date you miss you first miss a payment. Creditors have 180 days to collect a debt after the date of the first major delinquency and then the debt can stay on a report for seven years regardless of when you settle the account.

Effect

Surprisingly, settling a debt usually has almost no effect on your credit rating, according to Experian, one of the three major national credit reporting bureaus in the United States. Once you start missing several payments in a row, your score takes a dive, especially if you default on other accounts too. While settling an account might take a few points off of your score, it probably does not make much of a difference once you already have a score below 600 to 620.

Considerations

While you never want settled accounts or any other delinquent debt on your account, it may be better to resolve the debt now rather than let it bog down your finances and credit score in the future with constant missed payments. Settled and delinquent accounts do their most damage within the first 24 months of appearing on your credit report, so you can start the credit repair process sooner by quickly ending the debt. Also, you remove outstanding debt from your profile and prevent possible legal action in the future by settling a debt.

Warning

You probably can settle a debt on your own. Watch out for debt settlement companies that entice you with promises of removing an account if pay the debt settlement firm thousands of dollars in legal fees. Federal law lets creditors list accurate information, so the credit reporting bureaus will not delete anything as long as they can verify its accuracy. Some creditors and collection agencies agree to lie about a delinquent account and claim it was an "error" in return for a full or sometimes partial payment, but the national credit reporting firms do not promote the practice.