How settled card accounts impact your credit report

Opening Credits columnist Eric 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

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Question for the 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 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

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Updated: 03-23-2019