Afraid to answer the phone because a debt collector might be on the other end of the line? You’re not alone. It’s hard to dig your way out of debt. Luckily there are ways that you can settle your student loan debt for less than you owe and remove them from your credit report.
I’ll be upfront with you: It’s not always possible to remove a settled account from your credit report. Still, there are options you can try. Even if you’re not successful, settled accounts drop off with time. I’ll give you clear tips to rebuild your credit and get back on track after settling.
What is a settled account?
When a lender accepts a lower payment amount than the full balance owed on a debt, the account is settled.
Types of accounts that can be settled include:
- Credit cards
- Loans, including student loans
- Medical bills
If you agree to pay any disputed charges for a lower amount, that is also considered a settled account.
Once you’ve settled an account, you can no longer use it. This is because in order to settle, you will need to agree to close the account. For example, if you settle a credit card account, the lender will close your account and you won’t be able to use it in the future.
Settled accounts can affect your credit score and give you bad credit, particularly if you settle them yourself without following the right steps. Accounts stay on your credit report for 7 years, so it’s important to settle them the right way.
When you can’t afford to pay your bills in full, settling your accounts can be a way to get out of debt. Your lender agrees to accept less money than they’re owed, which is better for them than not receiving any money at all. However, for student loans, you will need to be in default first.
What are the benefits of settling a debt? The benefits of settling a debt are removing the delinquency or collection from your credit history and paying less than you actually owe on the debt.
Settled accounts: how they affect credit
Settled accounts can be bad news for your credit history and credit score if you don’t handle them directly. Most people and lenders will only settle delinquent accounts, which means they have late payments (delinquencies) on the account and have been sent to a collection agency.
How settled accounts affect credit score
Credit bureaus like Equifax, Experian, and TransUnion calculate your credit score or FICO® Score based on your credit history. Any delinquencies seriously harm your credit score and can affect your ability to get new credit, buy a home, get a car loan, rent an apartment, or set up utilities.
Settled accounts negatively impact your credit score. A settled account is like delinquency to credit bureaus because you didn’t pay them the amount you agreed to.
Settled accounts will lower your credit score as long as they’re in your credit history, which can last up to 7 years.
Settling an account will also close that account, leaving you with less available credit. That affects your credit utilization ratio, another factor for your credit score.
How many points will my credit score increase when I pay off collections? Your credit score may not increase at all when you pay off accounts in collections because you will still have late payments in your credit history. Your payment history is worth 35% of your credit score. However, it will stop the ongoing missed payments, which may help your score over the long run.
How does a settled account affect credit? A settled account affects credit negatively if your creditor doesn’t agree to delete the negative information after you’ve paid the account. If you have a pay-to-delete agreement, the settled account shouldn’t affect your credit once the account is paid.
How settled accounts affect credit history
Delinquencies result in negative information on your credit history, as past-due payments will show up for years on your credit report. Settled accounts are also labeled as settled instead of closed, which can be a red flag for other lenders.
Late payments and settled accounts are part of your payment history, which makes up 35% of your credit score.
Settling your account and impacting your credit may seem like a bad idea, but it’s much better than a charge-off. A charge-off appears in your credit history when the original creditor believes you will never pay off what’s owed to them.
Creditors resort to a charge-off when borrowers’ accounts are sent to debt collection agencies, and those accounts are unpaid for an extended period. Usually, charge-offs happen around the 6-month mark (180 days).
At that point, creditors usually send your account to collections. A collection agency works on behalf of your creditors to get back the money you owe.
How to remove a settled student loan account
It can be challenging to remove settled loans and credit card debt from your credit history, particularly without clear direction. There are a few steps you should take that will make the process of fixing your credit easier.
The first things to do when trying to remove a settled student loan from your credit report are:
- Get your free credit report
- Dispute any inaccurate information
Once those steps are finished, choose one of the following options that fits your situation:
- Send a goodwill letter
- Pay to delete
- Wait it out
Get your free credit report
Thanks to the Fair Credit Reporting Act, you’re entitled to get free copies of your credit history from all 3 of the major credit reporting agencies at AnnualCreditReport.com. Get your free credit report to make sure the information regarding your accounts is correct.
Double-check any delinquent accounts to ensure the amount owed and the date you stopped making payments (called your original delinquency date) are correct.
If your lender reported you as delinquent early, that could be negatively impacting your credit score.
Dispute any inaccurate information
If you find any inaccuracies in your credit report, dispute them as soon as possible. Send a letter to the credit bureau that has inaccurate information (the bureau is listed on your credit report). In the letter, let them know what the correct information is and ask them to change it.
Don’t assume that your credit report is always right — take the time to review it annually. Remember, no one is going to correct a mistake unless you do.
Send a goodwill letter
If your credit report is correct, you may be able to send a goodwill letter to your student loan lender.
Goodwill letters ask creditors to remove the negative item from your credit file. Though they’re under no obligation, some borrowers have found success in removing settled accounts this way. If you’ve been a great borrower other than your settlement, it’s worth a try.
Pay to delete
You can agree to settle your account and partially pay your balance if your creditor agrees to delete the delinquency from your credit report. Many credit repair or debt settlement companies specialize in settling accounts.
If you agree to settle a collection account for less than the full amount owed, be sure you get a letter from your creditor before you send payment. You should have your agreement to pay in exchange for deleting the negative information from your account in writing.
If you don’t get a letter and send payment right away, credit issuers or collection agencies don’t have any incentive to delete the delinquency from your account.
Note: Student loan holders (both federal and private) typically won't agree to delete negative information from your credit report when you negotiate a settlement.
Wait it out
Many accounts sent to paid collections and student loans in default only stay on your credit report for 7 years. (Bankruptcies stay on your report for 10 years.) If it’s been several years since your delinquency, it may be worth just waiting until it disappears from your credit history.
Can settled accounts be removed?
No, settled accounts can’t always be removed from your credit. The main reasons why you can’t remove a settled account include:
- Paying off a settled account without a pay-to-delete letter. (Your lender has no incentive to delete the settlement from your credit history.)
- Your lender has no incentive to remove the account. Legally, your lender doesn’t have to remove the account unless they’ve signed a letter saying otherwise.
- You haven’t paid off the settled amount. If you haven’t given the lender or collections agency the reduced amount you agreed to pay, they won’t take the settled account off your credit report.
How long do settled accounts stay on credit reports?
What happens if you stop paying your student loans? Here’s what can happen and how long it will affect your credit:
- Day 1: You miss your student loan payment.
- Day 30: Your student loan servicer can start charging you late fees.
- Day 90: Your servicer will begin to tell the credit bureaus that your student loan accounts are overdue. Many private student loans go into default around this benchmark, depending on your lender and loan terms.
- Day 270: Your federal student loan will go into default. Once in default, your servicer can demand that your account be paid in full immediately. The government can also garnish your paycheck and keep your tax return until your federal loan is paid off. The longer you stay in default, the more severe the potential consequences.
Settled accounts generally stay on credit reports for 7 years, assuming you haven’t negotiated to remove them.
If you’ve agreed to a pay-to-delete arrangement, your settled account should be removed as soon as your creditor reports the changes to the credit bureaus. If it’s been a few months since you’ve paid off your account, contact your creditor and ask them to remove the settlement.
As time goes by, delinquencies and settled accounts affect your credit score less and less. Eventually, after 7 years, they’ll drop off your credit report entirely.
How long do settled accounts stay on credit reports? Most settled accounts stay on your credit report for roughly 7 years unless you remove them with a pay-to-delete agreement.
Rebuilding your credit starts today: 5 tips
You’ve settled your accounts in collections. How do you rebuild your credit so you can get reasonable interest rates and qualify for loans?
Here are the 5 best ways to rebuild your credit after settling an account:
- Borrow responsibly. After you get out of debt, the worst thing you can do is get back into more debt. It can be good to borrow small amounts to rebuild your credit history, but only borrow what you can afford and pay it off quickly, ideally every month.
- Pay your bills on time. Late payments stay on your credit report for 7 years, whether they’re student loans or missed car payments. Rebuild your credit by making sure you make your payments on time. You may also want to consolidate any other student loans to keep them all in one place with one payment.
- Keep an eye on your credit report. Make sure you’re getting your free annual credit report each year. Look it over so you can spot any inaccuracies right away and get them fixed.
- Pay down credit cards and loans close to their limit. Part of your credit score is credit utilization, or how much of the available credit you’re using on each account. If you have a credit card that’s close to its limit, pay it down to improve your credit.
- Be an authorized user. Getting added as an authorized user of a credit card account with on-time payments can improve your credit score. You don’t even have to use the card to get the benefit of being an authorized user.
Rebuilding your credit takes time, but it’s absolutely worth it. And, the hard work will literally pay off if your good credit gets you a better interest rate, especially on purchases like a mortgage.
Need to settle an account? I can help.
Getting your personal finances back on track can be overwhelming. That’s why I’m here to help. I save my clients thousands of dollars by helping them get rid of their student loan debt for pennies on the dollar.
Because I specialize in student loans, I know the ins and outs of getting them settled so you can start improving your credit report.
If you need help getting out from under your student loans or feel like your credit is doomed, schedule a call with me to learn how I can help. Need great student loan advice? Be sure to sign up for my mailing list for free tips.