How Settled Debt Accounts Affect a Credit Score

Debt settlement is an effective strategy in ending creditor harassment in a scenario when you simply cannot afford to pay the balance of a debt, but that doesn’t mean it comes without negative consequences to your credit. Debt settlement is a tactic employed when a consumer falls far behind on his payments, and then drafts an agreement with his creditor to pay off the debt for less than his balance. The percentage of the debt settled is as little as 20 percent to as much as 80 percent of the total amount, depending on the debtor’s financial circumstances and age of the debt.

The Age of the Debt

The older the debt, the lesser amount a creditor is typically willing to settle for. Once a debt is discharged and placed into collection, many collection agencies are willing to settle a debt for pennies on the dollar.


The age of the debt is more than merely the settlement figure. Once the state statute of limitations expires on a creditor’s ability to collect a debt, they can send letters and make phone calls in attempts to collect for up to seven years after the default, but are unable to take legal action against the consumer in the form of lawsuits, judgments or liens. Once the statute of limitations expires, paying the debt can harm more than it helps.

The Debt Clock

The rules of engagement for unpaid debt to creditors is simple: bad debts remain on your credit report for seven years after the creditor discharges it, but any new activity on that debt re-ages the account and this includes settling the debt. Once a payment is recorded for the debt, even a settlement payment, the debt becomes “new”, following you as a “paid settlement” for seven more years; resulting in a detrimental result to your credit.

The Credit Factor

Having collection accounts or past due accounts on your credit report is never a good scenario. Debt settlement cushions the blow to your credit report, proving that despite a minor setback in your finances, you still made an effort to pay back the money you owed. While a debt settlement does not have the same negative impact to a credit report as collection accounts and late payments do, it does not offer a catchall solution for an instant fix.

The Bottom Line

Debts over half way through the statute of limitations, or close to the seven-year limit on a credit report might not be best served using debt settlement as an option. In this case, it might be best to let the debt expire. However, for debts only a couple of years old, debt settlement is a powerful way to end creditor harassment and get out of debt for less than the cost of long term interest payments and late fees.