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.
I’ve personally helped clients settle accounts with the Department of Education for federal student loans, plus lenders like Navient, SoFi, and Younomics. Read more about negotiating student loan settlements.
Learn More: How to Dispute Student Loans On Your Credit Report