ADVERTISEMENT

How settled card accounts impact your credit report

By

Opening Credits
Columnist Erica Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.

Ask a question.

'Opening Credits' stories

Question for the CreditCards.com expert

Dear Opening Credits,
I have my TransUnion credit report and see that a lot of stuff is wrong. I worked out a plan with my collection agency, and they are still showing that I owe the money even though I did pay them as per our agreement. I see $456 and $1,094 and settled next to them. They are with the same company, but for two separate problems. A year ago, I worked out a 60-percent-payment deal with them. What should I do to say that I am free of the bills? I don't have anything in writing because we did it over the phone and it was a long time ago. Am I screwed? I wanted to help my credit, not hurt it. I don't have the cash to pay off what it says I still owe, but I could put it on my credit card. Would that hurt my score though? -- Thomas 

Answer for the CreditCards.com expert Dear Thomas,
Wait -- you got what you wanted! Instead of paying the total amount that you owed, the collector agreed to let you off the hook for a significant part of the debt. They are no longer pursuing you for the remaining sum. That's a pretty sweet deal. 

However, what they can do is report the truth to the consumer credit bureaus. The fact is that you did not pay the balance on the accounts in full. Therefore, when they sent information about you to TransUnion (and Experian and Equifax), they may indicate that fact. I understand that you would like the reports to show that you've paid the balance to zero, but that would be false. You didn't. Remember, credit reports only have value when they're accurate -- otherwise they'd be useless.

More, if you look carefully, you will also see evidence of what happened before the accounts went to the collection agency. The late payments -- from the first day you skipped a cycle, to when the accounts were so delinquent that the creditor charged them off -- are on the reports and impacting your score. Even if you did pay the collector every penny, that unpleasant trail would remain.

Ultimately, settling an account is good for your wallet, but it's bad for your credit reports and score. The weightiest factor of your FICO score -- 35 percent -- is comprised of data concerning your payment history. Did you pay on time and in the amount that you should have? If so, great, your scores will reflect that. If you didn't, though, then your scores will be negatively affected.

Still, what happened from the time that the accounts went bad to the date you and the collector agreed on a settlement won't hurt your credit reports or scores forever. This type of negative information will only stay on your reports for a total of seven years. Even better, the older the information gets, the less of an issue it will be, since recent activity is factored in to your scores more heavily than older activity.

Because you settled the accounts a year ago, it will show up for another six years. But you do have a choice. If you really want to see an increase in those numbers, you can pay the remaining debt now. Your scores still won't be perfect, but they will probably be a bit better. Or you just can accept what you've done (and be happy that you saved some cash) and change the future instead. You have a credit card, so use it well now -- charge occasionally and pay every dollar you borrowed as soon as the bill comes to you.

Oh, and the next time you enter into any kind of legal agreement, get and keep the paperwork.

See related: 8 myths about settling credit card debt, Settling delinquent debt won't remove it from your credit report

Meet CreditCards.com's reader Q&A experts

Does a personal finance problem have you worried? Monday through Saturday, CreditCards.com's Q&A experts answer questions from readers. Ask a question, or click on any expert to see their previous answers.

Published: January 18, 2012


Join the discussion
We encourage an active and insightful conversation among our users. Please help us keep our community civil and respectful. For your safety, do not disclose confidential or personal information such as bank account numbers or social security numbers. Anything you post may be disclosed, published, transmitted or reused.

If you are commenting using a Facebook account, your profile information may be displayed with your comment depending on your privacy settings. By leaving the 'Post to Facebook' box selected, your comment will be published to your Facebook profile in addition to the space below.

The editorial content on CreditCards.com is not sponsored by any bank or credit card issuer. The journalists in the editorial department are separate from the company's business operations. The comments posted below are not provided, reviewed or approved by any company mentioned in our editorial content. Additionally, any companies mentioned in the content do not assume responsibility to ensure that all posts and/or questions are answered.




Follow Us


Updated: 10-01-2016


Weekly newsletter
Get the latest news, advice, articles and tips delivered to your inbox. It's FREE.


ADVERTISEMENT