Debt Settlements Effect on Credit Report

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Consider debt settlements effect on credit report standings before you consider this option to resolving debt. Debt settlements are often agreements between the debtor and the creditor for an amount less than what the current amount owed as payment for the debt in full. This can lead to a negative mark on your credit report.

What Is the Debt Settlements Effect on Credit Report Ratings

The effect of debt settlements depends on the circumstances of the situation. If you are currently behind in payments or not making any payment to your lender, agreeing to and honoring a debt settlement may improve your rating over time as opposed to never repaying the debt. However, if you have the means and the ability to pay your debt back as agreed, this is the better option for maintaining a strong credit score.

Short Term Effects

The short-term effects of a debt settlement on your credit report or credit score are dependent on your current payment situation. Consider your current payment history and debt ratio.

  • If you have excessive debt that you are behind on, month after month, a debt settlement will get you caught back up. It may be a reflection on your credit report as paid on time during a settlement period.
  • If you have a large amount of debt, paying down a significant chunk of that debt through a settlement may improve your credit report to new lenders.
  • If you are current on your loans, make payments on time, debt settlement may negatively influence your credit report and credit score in the short term. It may be a better option to repay the debt as agreed with the creditor instead, even if you pay a larger amount.

In the short term, many will find that debt settlement does immediately ding their credit score. This occurs because you are paying less than the actual amount owed. Some creditors will even place a notation on your credit report stating that the debt received a settlement for less than the amount owed.

However, if you are unable to repay the debt in any other way, it may be best to take this negative credit mark now rather than allow the debt to go unpaid over a long period. Many individuals find that debt settlements are immediately negative, but have long-term benefits.

Long Term Effects

If you look at debt settlements effect on credit report and ratings in the long term, you may see something a bit more positive. Since the debt is paid, it will likely come off the credit report within seven years. After that point, it will no longer negatively affect your credit score. More so, over time, the debt settlement will become less and less problematic for you, especially if you work to improve your credit score after the debt settlement.

When you are considering debt settlements, consider if you will likely be able to pay off the debt within seven years. If this is not likely and it will go unpaid for that length of time, it may be wise to consider a debt settlement instead.

This is especially true if the only other option is bankruptcy. Bankruptcy will likely have a more significant impact on your credit report and credit score. Bankruptcy remains on your credit report for up to 10 years. If you can pay your debt through a settlement, do so rather than filing a bankruptcy if you are concerned about your credit report.

Tips for After Debt Settlements

Debt Settlement and Credit Reports

Those who use a debt settlement to repay their debt will likely have a negative mark on their credit report for at least a few years. During that time, making wise credit decisions is necessary in order to build your credit back up.

  • Pay your debts on time every month.
  • Do apply for and use new credit, but only use as much credit as you can pay off in one month. Do not carry credit card debt from month to month.
  • Avoid amassing a large number of credit lines or a large amount of debt. This will negatively affect your credit rating.
  • Do monitor your credit report. If any false information is on the report, request it removed. After seven years, contact the credit bureaus and request that they remove the old debt you settled, unless it has already been removed.
Debt Settlements Effect on Credit Report