How does debt settlement effect my credit?
Step 1 - Is the account appearing on your credit report? For a debt to effect credit scores, it must be appearing on the borrowers
credit report. If the item is not appearing on the credit report, then
it would be inconsequential to the credit score whether the debt is settled,
paid or unpaid.
If you have confirmed that the account in question is appearing on your
report, then this is what you could expect as a result of resolving your debt:
- If you pay the debt in full, the credit report will likely be updated to
reflect a notation such as "PAID" or "PAID IN FULL".
The balance on the debt should be updated to reflect a $0 balance, or
sometimes, the balance will stop reporting alltogether.
- If you pay a reduced amount in settlement of the debt, the credit report
may reflect a notation such as "PAID IN SETTLEMENT FOR LESS THEN
THE FULL BALANCE".
Impact on Credit Score
Generally, paying a debt in full will have less of an adverse effect to
credit then paying a debt in a settlement. It is impossible to say exactly
how your credit score would be effected as the FICO credit scoring model
is proprietary, and each persons score would be effected differently in
part because each person is starting with a different baseline report.
Regardless of how a debt is resolved, the adverse notation is not a "life
sentence" to having bad credit. As the notation gets older, it's
impact on the score will gradually diminish. If the borrower is able to
establish positive lines of credit, that information may also help reduce
the impact of the older adverse settlment notations.
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Credit Reporting Timelines for a Settled Debt
In New York, a collection account that has been paid will report for a
maximum of 5 years. This only applied to notations made by the actual
debt collectors, it does not apply to the credit reporting by the original
creditor. The creditor's tradeline is subject to a 7 year maximum
for the adverse information.
Is your settlement reporting wrong on your credit report?
It is not unusual for credit reports to have some errors. Sometimes it's
the fault of the credit bureus, and sometimes it's due to the debt
collection agency failing to report the settlement. Fixing these issues
may require submitting a dispute to the credit bureau to inform them of
the settlement and to let them know that your credit report needs to be
updated. The method that we find most effective is to write a written
dispute letter and send it in by mail. Sometimes it can help to submit
a copy of the settlement completion letter. If you are having difficulty in
fixing your credit, our attorneys may be able to assist you.