One of the most important things that determines your financial reputation is your credit report. A fair score and a solid credit history can open up multiple financial opportunities for you including better interest rates, higher credit limits and even better renting and buying facilities. However, all this becomes a far thought when you enter a debt settlement.
There’s no doubt that a settled account is better than an unpaid or delinquent account but that doesn’t mean it won’t impact your credit score negatively. A debt settlement can stay on your credit report for up to 7 years which can lead to multiple financial restrictions. Fortunately, all the damage is temporary and you can easily diminish the impact of a settled account on your credit report with some strict measures.
Understanding Settled Accounts In Detail
An account is marked as “settled” when a creditor accepts the amount from the borrower that is less than what he originally owed. Lenders usually accept such offers of partial debt payment when the borrowers are behind their payments and are facing real time financial hardships.
In some cases, lenders turn the debt to collection agencies which can make things more difficult for the borrower. These agencies use relentless tactics to get out as much amount as they can from you without bringing you to the edge of declaring bankruptcy. As a borrower, this might seem like a good deal to you as you won’t have to pay the balance in full but in the long run, collections can reflect really poorly on your credit report and such a situation must be avoided at all costs.
The Effect Of Settled Accounts On Credit Report
A settled account can have both positive and negative impacts on your credit history. Positive because you are at least paying the maximum amount you can afford to get out of debt and it’s still a better decision than to completely ignore your debt and become delinquent on your payments. The negative impact is all because a settled account means a closed account. Even if your settled account isn’t active anymore, it will still stay on your report as a negative mark for years.
Your credit impact depends on multiple factors like the overall history of your account and the scoring model used. In general, settling your debt won’t remove your account, instead it will be updated to “settled”. Your future lenders can see this mark on your report and it can serve as an indication that you’ve had difficulty in paying your debt in full in the past. This will make them think twice before lending you money and even if they do, you’ll face high interest rates and lower credit limits.
How To Remove Settlements?
In order to remove a settled account from your credit report, you’ll have to go through a lot initially but if it all works well, your effort will be worth it! Here are a few steps you can take to remove settlements;
1-Write A Goodwill Letter
One of the best things you can do to remove your settlements is to write a goodwill letter to your debt collectors or to your creditors. In the letter you have to state the reason and the circumstances that led you to settling your account for less and that you now want to improve your financial situation which is why it’s important to get the negative mark removed from the report.
There’s absolutely no guarantee that your letter will be accepted and your collectors or creditors are under no obligation to accept it but the letter can still show that you are trying to rectify the situation and improve your financial behavior. With the right words, you can still convince your creditor to make an exception for you and remove the account off your report for goodwill.
2-Disputes
In order to remove the settlement from your credit history, you can dispute any incorrect information without any hassle. The FCRA, Fair Credit Reporting Act gives you all the right to dispute anything that you think is incorrect or outdated on your report.
This tactic will only work if the information really is incorrect. If your debt collector or creditor proves that you’ve recently settled your debt with evidence then the dispute won’t do any good for you and the credit bureau will keep it marked on your report.
3- “Pay For Delete” Or “No Objection Certificate”
Another way to remove your settlement is to get a “pay for delete” or “no objection certificate” from your creditor when settling your debt. Again, there’s no guarantee that this method will work and that your creditor will agree to your terms. You can offer paying the full outstanding amount to your creditor in exchange for a “pay for delete” agreement.
You have to discuss these terms with your creditor during your debt settlement negotiations and if they agree to it then it’s important to get it all in writing. Get a “no objection certificate” from the creditor to ensure that he will remove your account and will not report the “partial payment” to the credit bureau. Expect your creditor to reject your initial offer and come prepared with some great negotiation and convincing skills to make your lender agree to your terms.
Best Way To Rebuild Your Credit After Debt Settlement
If for some reason all of the above mentioned tactics fail and your report shows that you’ve settled an account then it’s important not to lose hope and instead shift your focus towards rebuilding your credit. Here are some effective ways to do that;
Become An Authorized User
The best strategy you can use is to become an authorized user on someone else’s credit card. Doing so will help you gain all the benefit from the original cardholders’ positive financial behaviour. Make sure to choose the one who is punctual with his payments and has a great overall credit history. The better the cardholder’s history is, the more it will reflect on your credit score.
Use A Secured Credit Card
One of the most important things people should do after a debt settlement is to apply for a secured card. A secured credit card requires a security deposit and initially that figure will determine your credit limit too. For example, if you’ve made a deposit of $400, your credit limit will also be $400. Now the trick here is to maintain and manage that card responsibly so that it reflects on your credit score. You have to use as little of your credit limit as possible. Use your card frequently but ensure a low credit utilization ratio and make your payments on time. With such measures, you can definitely expect some improvement in your credit score.
Avoid Debt
After debt settlement, your credit score takes a huge dip and it can get even worse when you apply for another loan again. You need to avoid debt because the more loans you take, the more it will affect your credit score. Especially for the first 7 to 10 years, you should make informed financial decisions for a sounder financial future and that includes avoiding getting into more debt.
Key Takeaways
There’s absolutely no guarantee that a creditor or collector will agree on removing your “settled” account from your credit report but if there’s even a slightest chance then yes, you should take the risk and do all you can to convince them. However, if they don’t agree, know that it’s not going to be the end of the world for you and you can still do a lot to improve your score and rebuild your history. It’s a time taking process that demands patience and persistence. You can’t expect your score to grow overnight with the right measures. It will take months and sometimes years but eventually if you are consistent with your efforts, you’ll achieve your ultimate financial goal.
FAQs
Q1. What Are The Alternatives To Debt Settlement?
There are multiple debt relief options out there but the right one depends on your financial situation and the amount of money you owe to your creditors. You can opt for debt consolidation if you can afford to make the monthly payments or you can even opt for loan modifications or debt management plans to sort your debt.
Q2. Can You Hire A Credit Repair Agency To Remove Your Settled Account?
Yes, you can definitely hire a third party credit repair agency to help you remove your settled accounts. However, the results are never guaranteed and you can’t be sure if it will work.
Q3. Is It Possible To Remove Settled Accounts If The Debt Is Sold Off To A Collections?
Yes, you can always try to remove your settled accounts even when dealing with collections. If the collection agency doesn’t agree on your terms, you can then contact the original creditor directly and request him to remove it for you. Worried about removing your settlements from your credit report? Try Mountains Debt Relief services for the best assistance and efficient results!