When you settle an account, such as a collection account, the creditor or the collection agency will update the account on your credit report to reflect that it has been settled in full for less than the total balance owed, during which you are no longer held responsible for it.
This indicates that the account is closed and that there is no longer a balance due. However, a settled account will still remain on your credit report for seven years from its original delinquency date. Meaning, even if you settled an account in year four, you will still need to wait for three more years before it falls off of your credit report.
This is because Your credit report represents the history of how you have managed your accounts and debts. When you pay off or close an account, the lender updates your report to reflect the account's new payment status. However, closing or paying off an account does not cause it to be removed immediately from your report.
What Is A Settled Account?
An account is considered “settled” when the creditor, lender, or collection agency has agreed to accept less than the full balance owed as payment. While you are no longer held responsible for the account once it has been settled, it is still considered potentially negative. Simply because you did not repay the entire debt as agreed upon under the original contract.
Fortunately, most lenders view settled accounts more favorably than an account that is still past due with an outstanding balance. In fact, in some cases, lenders will require you to either pay off or settle any outstanding debts before you can qualify for a loan, such as when you apply for a mortgage loan.
What Happens When You Settle A Collection Account?
When an account is seriously past due, the lender may write off the debt as a loss and then transfer the debt to their collection department, or to a third-party collection agency. In this case, you no longer owe the debt to your original creditor. Instead, you now owe the collection agency or the entity that owns your credit account.
If your account is sent to collections, the original account will still remain on your credit report but will indicate that it has now been closed or transferred to another company. Once this happens, the account will no longer show an outstanding amount owed.
Do understand, however, despite the account not appearing as outstanding debt, it will still be considered a derogatory mark and will hurt your credit. This is because the collection agency may report the new collection account to your credit history as a separate entry, which is one of the most damaging items to have on your credit report.
If you settle the account, the collection agency will contact the Credit Reporting Bureaus- Experian, Equifax, and TransUnion- and update the account information to reflect that it has been, in fact, settled, but for less than originally agreed. However, as mentioned before, settling an account does not cause it to be removed immediately from your credit report.
To put this into perspective, let’s assume you have a collections account. If you settle that account five years after the original date of the delinquency, then there is almost certainly some time remaining before the record has reached the seven-year mark. Meaning, it will stay on record for its full duration regardless if you settle the account or not.
Should You Accept A Settlement Offer?
Although settling an account is still considered as a negative, settling the account is still better than not paying it at all. As a matter of fact, if you are planning on making a major purchase, such as buying a home or a car, your lender may require you to either settle or pay in full any outstanding delinquent debts before you can qualify for financing.
If paying the debt in full is not an option, settling the account for less than what is owed, despite what was originally stated in the original contract, is usually more beneficial than leaving the debt outstanding.
The Bottom Line
To sum up, an account is settled when the lender has agreed to accept less than the full balance owed as payment. However, despite you no longer being held responsible for the account, it will still remain on your credit report for seven years from the date of the delinquency.
However, if you believe that your settled account has already lived its full duration, and it is still present in your credit report, you need to get it disputed. Inaccurate, incomplete, and fraudulent information on your credit report, especially those that are left to their own devices, can cause severe damage to your credit. Call us at 888-799-7267 to schedule a Free Consultation.
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