Your credit rating is a time-sensitive picture of your financial health through a collection of personal and credit account information. Lenders, potential insurers, employers and landlords use your credit score to determine if you are credit worthy. Accepting a settlement from a debt collector will affect your credit, but you can control the extent of the impact.
What is a Settlement?
Your three-digit credit score is calculated based on the information provided to the credit reporting agencies from existing and potential lenders as well as information that is available publicly. A settlement from a debt collector is often listed in the accounts section of your credit report as "settled for less than originally agreed." The settled account is closed, but that one statement can remain as part of your report and negatively affect your score for seven years.
Credit Impact
Payment history is one indicator that has a significant impact on your credit score. How you pay your bills accounts for roughly 35 percent of your total credit rating. Accepting a settlement from a debt collector may seem like a responsible action, especially if you are not in the position to pay the entire balance, but the negative implications of a settled account is a red flag to potential lenders. The upside to accepting a settlement is that the debt collector will not pursue a judgment for the outstanding debt. Judgments can affect your credit rating for up to 20 years in some states.
Agreement Stipulations
Credit reporting agencies list credit account information that debt collectors and other creditors report to them. As part of the settlement agreement, negotiate with the debt collector to remove the negative account entries attributed to the debt from your credit report. This includes the delinquency entries the collector likely reported to your account prior to your accepting a settlement. If you can have those negative items removed, the settlement will not affect your credit score. Get the account removal stipulation agreement in writing from the debt collector.
Alternatives to Settlement
Accepting a settlement agreement from a debt collector is better than not paying the debt in terms of potential judgment litigation, especially if you can have the account listing removed from your account. If the debt collector refuses to remove the account listing, your credit is negatively affected for at least seven years, whether you accept the settlement or not. Alternatives to settlement include renegotiating a repayment plan with the debt collector. If you make your payments on time, your payment history will be positively affected.
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