Should Settled Debt be on Credit Report?

Dear Credit Card Adviser,I settled a negotiated amount to pay off a credit card in May 2007. On my credit report, it shows 120-plus days past due in the "current status" area. Is this a factor for my low credit score? Do I need to have this changed to indicate settled debt?-Judy

Dear Judy,

You raise some interesting questions about debt settlement, an arrangement between the consumer and creditor in which the credit card issuer agrees to accept less than the entire amount owed as payment in full.

Settling a debt won't hide the record of missed payments on that account.

"If an account has gone 120 days past due, that account history will remain on the file for seven years from the date of first delinquency on the account," said Jennifer Costello, a spokeswoman at Equifax, in an e-mailed statement.

A current copy of your credit report should show the change in current status, though. "When the company that owns the debt reports the settled status, then the current status will be 'settled,'" says Maxine Sweet, vice president of public education at Experian. Sweet says the status should show that the account is now settled, and was delinquent 120 days.

An account status that indicates debt settlement is bad news for your credit score. For a previous column on the subject, FICO's consumer operations manager Barry Paperno has said that debt settlement is considered negative by the scoring model "to the same extent as a charge-off or an account included in bankruptcy or repossession or something of that nature in which the lender took a loss on the debt."

According to your question, the settled status is not on your credit report. Under the circumstances though, that's not necessarily a good thing. Although debt settlement generally has a negative impact on credit scores, the account is already seriously delinquent. In addition, you don't want your credit report to incorrectly show that the account is still delinquent and unpaid when, in fact, you did clear the balance through the arrangement. A debt settlement looks bad to potential lenders that check your credit report, but a currently delinquent, unpaid account can look worse.

To gauge your credit rating, try our FICO score estimator.

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