How Long Does Debt Settlement Stay On Your Credit Report?

If you settled an account for an amount that's less than what you owed, you probably noticed a debt settlement notation on your credit report. We often get asked how long does debt settlement remain on my credit report? We will answer this question in much detail below.

How Long Does Debt Settlement Stay On Your Credit Report?

Debt settlement stays on your credit report for 7 years from the date that you first became delinquent on your account. As the debt settlement ages, its impact on your credit score will lessen. After the 7 year period, the debt settled account will automatically be removed from your credit report. In the event that the account is not removed after 7 years, you can file a dispute with the credit reporting bureau reporting the account to have it removed from your credit report.

For example, if you became delinquent on your credit card (you did not make your payment) on January 1st, 2021, the debt settlement will remain on your credit report until January 1st, 2028, at which it will be automatically removed from your credit report.

Debt settlement is reported to the credit reporting bureaus because it serves to inform future lenders and creditors that you settled your debt and could not pay off the account as originally agreed upon between you and your lender. It allows future lenders to assess the risk you pose to them when it comes to lending you money. That said, although lenders will view a settled account negatively, having an account settled is much better than becoming delinquent on the account, which can cause significant damage to your credit score.

What Does Settled Account or Debt Settlement Mean?

Debt settlement and settling a debt refers to the situation where the lender agrees to accept payment on an account for an amount less than original agreed upon between the two parties. For example, if you charge $5,000 on your credit card and you've managed to pay down the card to $3,500. However, you experience financial troubles that prevent you from repaying the remaining $3,500, you may ask your lender to settle the account. If your lender agrees to accept a payment less than $3,500 (for example $2000), the account would be considered as settled. When an account is settled, the settled notation will be added to your account, alerting future lenders that you have settled an account in the past. The settled account will remain on your credit report for 7 years from the date that you first became delinquent on the account. Your account will continue to appear as settled even if you close down your account. After the 7 year period, the settled account will automatically be removed from your credit report.

Debt Settlement vs Being Current on Your Account

Debt settlement simply means that you paid off an account for less than what you owed on it For example, if you owed $5000 on your credit card and the bank agrees to let you off the hook for the debt in exchange for $3500, you would have settled the account. In such a situation, the settlement will be notated on your credit report, lowering your credit score.

On the other hand, staying current on your account means that you are continuing to pay off the account as originally agreed upon between you and your lender. That said, if you're falling behind on payments for one of your accounts, you should continue to make payments on the accounts you can afford to pay off. This is so because having one late account is better than having multiple late accounts.

How Does Debt Settlement Affect Your Credit Score?

Debt settlement will have a significant negative impact on your credit score, the higher your credit score, the bigger the drop in your score. That said, the effect on your credit score will depend on the current condition of your credit, how much of your available credit you're utilizing, and whether you have other negative marks on your credit report. If you already have multiple negative marks on your credit report, you may not notice as significant of a drop as someone who has a flawless credit history.

So, you might be wondering: why does debt settlement lower your credit score? You paid off the account and settled it.

Debt settlement lowers your credit score because you have demonstrated an inability to pay off your account as originally agreed upon between you and your lender. The credit scoring system rewards those who pay their accounts as agreed upon originally and dings those who fail to repay their debt as originally agreed upon.

Since you paid off a portion of your debt and not the full amount as originally agreed, your credit score will suffer. Additionally, the notation on your credit report serves the purpose of alerting new lenders and creditors that you did not pay an account as initially agreed upon so that they can better assess the risk of lending money to you in the future.

Furthermore, if you've settled your debt after having late payment marks added to your credit report, your credit score may have already taken a hit, so a debt settlement notation may not cause that much damage to your credit score.

Can You Remove a Debt Settlement From Your Credit Report?

If you have yet to settle an account, you can try to negotiate with your lender by asking them not to add the settlement notation on your credit report in exchange for you paying off the debt. Some lenders may agree to close the account in good standing in exchange for a partial payment on the debt you owe them. However, some lenders may not be willing to negotiate this way.

In the event that you have already settled an account and the notation has been added to your credit report, it is very difficult to have it removed from your credit report. You will only be able to remove a debt settled account if there is an error in the information that appears on your credit report or the account does not belong to you and was reported on your credit report as a result of an error.

If the account does not belong to you or there is an error in the information, you should file a dispute with the credit reporting bureau reporting the incorrect information. Typically, after you file a dispute, the credit reporting bureaus will render a result within 30 days or less after conducting an investigation to determine whether there was an error in the information that you're disputing.

If the investigation finds that there is no error, the account will remain on your credit report, however, if they find that there is indeed an error, the account will be removed from your credit report.

How to Improve Your Credit After Debt Settlement?

If you want to improve your credit after settling your debt, you should do the following:

Make all of your payments on time - Your payment history accounts for 35% of your credit score, so making your credit card and loan payments on time will improve your credit score. If you've fallen behind on one account, do not stop making on your other accounts. Keep paying the accounts you can afford to pay as this will prevent further damage to your credit.

Reduce your balance - Your credit utilization (how much of your available credit you're using) accounts for 30% of your credit score, so if you want to improve your credit, you should pay off as much of your debt as you possibly can. Reducing your balance on things such as credit cards and loans will improve your credit score. You should try to keep your credit utilization below 10% of your available credit and never exceed 30%. If you exceed 30% of your credit utilization, you will see a drop in your credit score.

Keep old accounts - If you have old accounts that are in good standing and have a positive payment history, you should keep them open. This is so because your account ages accounts for 15% of your credit score, so keeping old accounts in good standing open will add to your account age, boosting your credit score.

Don't submit too many credit applications - If you want to improve your credit score, you should refrain from submitting too many credit applications within a short period of time. This is so because every time you submit a credit application for things such as a credit card or loan, a hard inquiry is added to your credit report. Although a single hard inquiry will have a small negative impact on your credit score, if you accumulate too many within a short period of time, you will notice a significant drop in your credit score.

Check your credit report - You should periodically check your credit report to ensure that nothing negative is causing a drop in your credit score. If you find something pulling down your score, you should address it. Additionally, if inaccurate or incorrect information was added to your credit report, you should dispute the inaccurate information with the credit reporting bureau reporting the information.

Bottom Line

At this point, you probably know that debt settlement remains on your credit report and continue to affect your credit score for seven years starting from the date you first became delinquent on your account. That said, as the debt settlement ages, its impact on your credit score will lessen. If a debt settlement notation was added to your credit report in error, you should dispute it with the credit reporting bureau reporting inaccurate or incorrect information. However, removing a valid debt settlement from your credit report is extremely difficult, if not impossible to do. If you have any general questions or comments about debt settlements, please feel free to leave them in the comments section below.