Settling a debt can relieve you of the stress of collection calls and a mounting pile of paperwork. However, doing so isn't always good for your credit report. In most cases a settled debt appears on your credit report and the effect varies depending on your credit history.
Reaching an agreement to pay a recent obligation typically appears on your credit report as a debt that was settled. Agreeing to a repayment plan as part of the settlement means your repayment history may appear on your credit report, particularly if you miss payments. A settlement can harm your credit because it means you're not paying off your balances in full. However, if you've left a debt unpaid for months, you may see a steady credit improvement after your settlement. That's because you're no longer receiving late-payment notices and your debt won't be increasing due to interest and fees being tacked on.
Most items fall off your credit report after seven years. However, settling an old debt could cause the item to go back on your credit report, potentially damaging your score. Each state has its own statute of limitations for debts and you can't be sued after that amount of time lapses. If you're past the time window it may be better to avoid settling your debt to keep the negative item off your report.
When you decide to settle a debt you should weigh two competing factors: the effect on your credit score and your desire to reduce the stress of having the debt. Sometimes it's better to make minimum payments while you save the money to pay the debt in its entirety. You can also make larger payments each month to make the debt current. If you're overwhelmed with debt, consult an attorney who specializes in consumer law to help you decide on the best course of action.
Having several credit accounts can help mitigate the negative effects of a settled debt as long as your other accounts are current. Keep in mind that your credit score is based on five factors. Your payment history and the total amount you owe are the most significant, followed by the length of your credit history, your history of new credit and credit applications, and the types of credit you have access to.
Van Thompson is an attorney and writer. A former martial arts instructor, he holds bachelor's degrees in music and computer science from Westchester University, and a juris doctor from Georgia State University. He is the recipient of numerous writing awards, including a 2009 CALI Legal Writing Award.