How Does a Paid Settlement Affect My Credit?

When you are long overdue on debt payments, creditors will sometimes accept a settlement, which is a payment that does not cover the full amount you owe. Although a settlement allows you to get rid of a debt without paying it off in full, it also damages your credit score.

Number of Points

An account that appears on your credit report as a paid settlement will hurt your credit score. The number of points it will take off depends on what your credit score was before you settled. The higher your score was, the more points you will lose. FICO, which provides the most common credit scoring formula, estimates that someone with a credit score of about 780 before the settlement would lose 105 to 125 points. Someone with a credit score of 680 to begin with would lose only 45 to 65 points.

Time Frame

Negative items, including paid settlement accounts, can stay on your credit report for up to seven years from the time when the account was closed. If you settle an account with the original creditor, it will stay for seven years after the settlement date. However, if you settle an account with a collections agency, it is seven years from when the original account was sent to collections. Therefore, it might not be a full seven years after you pay the settlement. For example, if you stopped paying an account in June 2009, it went to collections in December 2009 and you and settled it in March 2011, it will stay on your account until December 2016.

Effects

Creditors will be wary of lending to you when you have a settlement on your credit report. This is not only because it lowers your credit score, but also because it indicates that a creditor did not receive full repayment. If you have settled a debt before, you are more likely to do it again, and creditors lose money on settlements. When you do receive credit, the settlement is likely to cause you to pay a higher interest rate than you would have without the settlement.

Potential Negotiations

When keeping your credit score high is extremely important to you, one option is to negotiate for the creditor to report the account as "paid as agreed" instead of a paid settlement. In this situation, you will probably have to pay a slightly higher amount, but the benefit to your credit score could save you far more in the future by securing lower interest rates for you. When you negotiate for a "paid as agreed" notation, get the agreement in writing before you pay anything.