How Long Does a Settlement Stay on Your Credit Report?
Understand the reporting period for debt settlements on your credit report and their impact.
A debt settlement is an agreement with a creditor to pay back a debt for less than the full amount owed. While it can resolve overwhelming debt, it impacts an individual’s credit report and financial standing. Understanding how settlements are recorded and their duration on credit reports is important for anyone considering this process.
How Settlements Appear on Credit Reports
When a debt is settled, it is reported on a credit report with specific notations indicating that less than the full amount was paid. Common phrases or codes used by creditors include “settled for less than the full amount,” “paid, settled,” or “settled.” This differs from an account that is paid in full, which would show a “paid in full” or “closed, paid” status. An account that is charged off without settlement appears with a “charge-off” status.
A settled account generally has a negative impact on a credit score. This is because it signals to potential lenders that the original terms of the credit agreement were not fulfilled. While a settlement negatively affects credit, it is viewed more favorably than an unpaid charge-off or an account that goes to collections without any payment, as it demonstrates some effort to resolve the debt. The initial drop in credit score can be substantial, especially for individuals who had higher scores prior to the settlement.
The Standard Reporting Period
A settled account typically remains on a credit report for up to seven years. This seven-year period is a standard timeframe for most negative items and is governed by the Fair Credit Reporting Act (FCRA). The FCRA is a federal law promoting the accuracy, fairness, and privacy of consumer reporting information.
The seven-year period usually begins from the date of the original delinquency that led to the settlement, not from the date the settlement agreement was reached or the final payment was made. For example, if payments were missed in January 2024, and a settlement was finalized in June 2024, the seven-year clock for reporting the settlement would start from January 2024. The negative impact of the settled account on a credit score tends to diminish over time as the account ages on the report.
Checking Your Credit Reports
Individuals can access their credit reports to review the status of settled accounts and other financial information. By law, consumers are entitled to one free credit report every 12 months from each of the three major nationwide credit reporting companies: Equifax, Experian, and TransUnion. The official website for obtaining these free reports is AnnualCreditReport.com.
When reviewing a credit report, examine the settled account entry. Look for the account status, such as “settled for less than the full amount,” and verify the date of first delinquency to confirm the seven-year reporting timeline. This helps ensure that the information is accurate and that the account is removed once the reporting period expires. If discrepancies are found, the FCRA grants consumers the right to dispute inaccurate information with the credit bureaus.
After a Settled Account is Removed
Once the seven-year reporting period passes, a settled account is automatically removed from an individual’s credit report. This removal positively affects an individual’s credit score. With the negative mark no longer present, the overall credit profile appears stronger to potential lenders.
The absence of the settled account means that a significant derogatory item is no longer factored into credit scoring models. While the immediate impact on the score varies depending on other elements of the credit history, the removal of a settled debt generally contributes to an improvement. This allows for a more favorable assessment of creditworthiness, potentially leading to better terms for new credit or loans.