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Debt settlement can damage your credit score, but there are ways around it with the right negotiation tactics.
In some cases, debt settlement is your best option for debt relief. Unfortunately, it can leave an ugly mark on your credit report. Settled debt can remain on your report for years. This may not make any sense at first. Why would an account that you paid off be a bad thing? Wouldn’t it be neutral, or even positive, to show potential lenders that you found a way to pay? Though we wish it were, this isn’t the case.
When you settle debt, it means your lender has agreed to take less than you actually owe. This is a bad sign for future lenders. To them, it looks like you’re risky to lend to because they may not get all of their money back. This is why it’s a negative item on your credit report, even though it seems positive because you got out of debt.
A late payment on an account is called a delinquency. Delinquencies are reported to the credit bureaus after 30, 60, 90, and 120 days of being late. A settled debt with no delinquent payments will stay on your credit report for seven years from the date it was settled accordingly to regulations outlined in the Fair Credit Reporting Act (FCRA). If you do make a late payment, it will stay on your report starting on the date it became a delinquent account and was never current again.
If the account that you settle is a collections account, then the negative item in your credit report would remain for seven years from the date the remaining balance was discharged.
When you settle your debt, your credit score can drop between 60 and 100 points, depending on your credit history and where you started. This is one of the major reasons why you should use a professional debt settlement company instead of trying to do it yourself. If you mess up, your score could fall even further and take even longer to repair.
There are a few good methods you can use to get around the pesky seven-year rule, including pay-for-delete and re-aging. There are pros and cons of each method, so get educated on them before you decide which one you want to try.
Pay-for-delete works exactly as it sounds. Basically, you offer to pay off the account on your credit report in full in exchange for it to be wiped from the report entirely. This is most commonly seen with collection accounts. Collections appear in the public records section of your credit report, so they are not normal accounts that report credit history. This removes the negative impact of the collection account from your credit profile.
This is one of the most common ways to alleviate the damage caused by debts in collections. If your debt was purchased by a debt buyer, they are more likely to settle easily. If you agree to pay a slightly higher percentage, then they’ll agree to remove the collection account from your report.
This process changes the status of your accounts – at least, how they’re shown on your credit report. If you work out a repayment plan with a creditor, they can re-age your account by no longer reporting it as delinquent. You get a kind of clean slate for your debt. This can be great if you have the means to pay off the account and simply need to catch up on the payments you already missed. However, if you fail to follow through with the repayment plan, you will run into the same issues. This method applies to debts that are still with the original creditor. It’s also the least common.
Another option is to negotiate for the account to be listed as paid as agreed. This is what debt settlement companies will negotiate with your creditors if you go through a debt settlement program. Once the settlement is paid and the account is closed, the creditor will list the account as paid as agreed.
Although the paid as agreed status will still count as a negative item on your credit report, it doesn’t have nearly the negative impact as a default or charge-off status. It shows creditors that review your report that you settled your debt and at least worked to pay some of what you owed back.
Unsurprisingly, debt collectors don’t always have your best interest in mind. Some try to make your last delinquent payment look as if it happened later than it did. Keep your own records so you know exactly when your seven years is up. If a collector tries to falsely re-age your account, this is against the law and your records can prove it.
Getting a spammy-sounding call from a debt collector is one thing, but seeing an incorrect delinquent account on your credit report is a whole new level of scary. Don’t worry – there’s a way to get rid of it. Gather all the evidence you have to prove that the account isn’t yours and get ready to dispute. You need to send the credit bureaus reporting the error a dispute letter explaining your situation.
Although it’s possible to DIY your debt settlement and its removal from your credit report, it’s a risky venture. Your best option is to reach out to a professional (while watching out for scams) to secure your financial future and professionally settle your debt. Either way, make sure the account in question gets paid off. An account listed as paid as agreed on your credit report will always look better than one that you left unpaid.
If you’ve already settled and you’re trying to fix your credit, the same goes for credit repair. Getting professional help is your best bet for fixing your credit if settlement causes it to dip.
Article last modified on June 26, 2019. Published by Debt.com, LLC