If you are doing damage control after a creditor writes down your debt as noncollectable, you may know that settling a debt causes even more damage. A settled charge-off account probably does not do as much damage as you think. The settlement may even improve your credit rating if your only alternative is to ignore the debt.
Identification
Settling any account for less than the original balance usually negatively impacts a credit rating. John Ulzheimer of Smart Credit named settlements of the seven deadly sins in the FICO scoring system. If the lender charges off your debt and you still have a rating of at least 780, a settlement can do more than 125 points of damage and probably not less than 105, according to Ellen Cannon of Bankrate.
Considerations
A charge-off can take 100 or more points off of a credit rating and any other missed payments cause even more damage. Thus, by the time you start to negotiate a settlement, you likely have terrible credit. Because negative items do less damage when you have other negative items on your credit history, the settlement probably has a negligible effect, according to Maxine Sweet of Experian.
Lowering Debt Load
The balance on unpaid charge-off and collection accounts counts against you in the "amount owed" category part of the FICO credit scoring formula, which is worth 30 percent of your risk rating. If you have thousands of dollars in charged-off debt, eliminating it from your credit report can more than make up for the presence of a settled account in your credit history.
Tip
You should talk to your creditor before it charges off an account and ask for help, such as offering to set up an installment agreement. Settling a debt may benefit your financial life too because a lender can sue you for the debt and force payment by obtaining a garnishment order. Also, dealing with a delinquent debt looks better on your credit report than ignoring it, which may sway a creditor's decision to lend you credit in lieu of a poor credit rating.
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