Collections accounts on your credit report will have a damaging affect on your credit score and will hinder your ability to obtain credit for home and car loans. Settling these accounts instead of paying off the account in full will do more to hurt than help your credit score.
What Is a Debt Settlement?
Creditors will offer a debt settlement to account holders whom they have not received payment from, or haven't received payment from in a long time. In the eyes of a creditor, it's best to receive some payment rather then no payment at all. The creditor will agree to reduce the balance of the unpaid account if the settlement balance is paid in a set time frame, usually with a promise of reporting this settlement payment to the credit bureaus.
Settling Vs. Paid-As-Agreed
Settling a collections account will not have the same affect on your credit score as paying the debt in full. When a debt is settled, the account will show up as "settled-as-agreed" on your credit report. When a past due account is fully satisfied, the account will show "paid-as-agreed." A collections account paid in full will have a more positive affect on your credit score than a debt that was settled. Regardless, having a collections account paid (or settled) is significantly better than having an unpaid collection on your credit report and will increase your credit score in time.
Impact of Debt Settlements
Always pay unpaid collections accounts in full, if possible. Settling debt can have negative affects on your credit worthiness. Future creditors that view your credit report will notice collection accounts that have been settled instead of paid in full. This may lessen your chance of obtaining new credit or loans as the creditor will view you as a risky client.
Rebuild Your Credit History
Start rebuilding your credit by paying off all unpaid collections accounts on your credit report. Make sure your current account payments are always paid on time and in full. Good payment history with current accounts will have a positive affect on your credit score and will help you rebuild your credit worthiness making it easier for you to obtain a bank loan in the future. If your credit is bad, you can help rebuild your credit by obtaining a secured credit card or secured bank loan.
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