How Does Debt Settlement Affect Your Credit?

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Debt settlement can have a negative effect on your credit. How bad will it be? It’s impossible to predict the exact number of points you’ll lose, or when you’ll be able to get approved for financing again, since there are a number of factors that come into play.

One thing is certain: negative activities associated with debt settlement — like missing a credit card payment or having a debt charged off — will hurt your credit score and stay on your credit reports for seven years.

Yes, that’s a long time to wait, but fortunately there are ways to improve your scores in the meantime.

How Long Does Debt Settlement Stay on Your Credit Report?

Debt settlement doesn’t specifically appear on your credit reports, but certain activities related to debt settlement can stay on your reports for seven years. They include missed debt payments and paying less than the full balance you owe.

During that seven-year period, lenders can review your reports and see that you’ve had trouble paying back debt. During that time (especially for the first couple of years) they might not want to offer you a new loan or credit card. You might have to deal with high APR and costly finance charges, too.

How Debt Settlement Affects Your Credit Score

Settling debt can have both a negative and a positive effect on your credit scores. You’re most likely to see a drop in points up-front, but over time you can gain back everything you lost and more. Regardless of the setback, you can always work to experience the benefits of better credit.

Missing Payments

Settling debt isn’t usually the first stage of financial hardship. It’s likely that you settled debt after missing credit card or loan payments, or having accounts sold to debt collectors.

If so, your credit scores probably took a big hit already. That’s because your payment history with debt is the biggest factor weighed into your credit scores. In fact, it makes up more than one-third (35%) of your score.

For someone with high credit scores, just one missed debt payment can drop your score by 100 points or more. And those missed payments stay on your credit reports for seven years, although the impact lessens over time.

On the other hand, settling debt can be a strategy for preventing future missed payments. If debt settlement can help you stop missing payments, it might help curtail the damage.

If you find yourself thinking, “I can’t pay my credit cards,” even after debt settlement, take a minute to learn more about debt relief.

Lower Credit Utilization

According to FICO, one way debt settlement helps improve your credit scores is by lowering your credit utilization, also known as your debt-to-credit ratio (DTI).

Credit utilization is the second biggest factor that determines your credit scores (30%). You can improve this area by reducing the amount of debt you owe in comparison to either the amount you originally borrowed (for a loan), or to your credit limit (for credit cards).

To calculate your DTI, divide your debt balance by either your credit card limit or the original loan balance, and then multiple by 100.

DTI = (Total debt balance / credit limit or original loan amount) x 100

Sample Debt-to-Credit Scenario

BalanceLimit / Loan amountDTI
Credit Card$5,000$5,000100%


After you settle debt, the amount you don’t pay will be charged off by the creditor or collector. Charge-offs will stay on your credit for seven years. They can have a negative impact on your scores, especially right after you settle your debt, and they show future creditors that you did not pay back your debt as originally agreed.


There are other consequences of debt settlement that won’t necessarily impact your credit, but they can hit your wallet.

If you hire a for-profit debt settlement company, you’ll have to pay them a monthly fee. Unfortunately, they keep collecting the funds — often for as long as 2-3 years — and only send some of it to your creditors after you’ve fallen behind on all the accounts.

In the meantime, your creditors are likely to realize that you don’t plan to pay the full balance. As a result, they may take you to court for the money.


Taxes can be another financial consequence of settling debt. If you have more than $600 in debt forgiven when you settle your debt, you will have to report the unpaid amount as income to the IRS and pay income taxes on the charged-off amount.

How to Remove Settled Accounts from Credit Reports

Just like any other negative mark, there’s no magic answer for how to remove settled accounts from credit reports.

Sure, there are lots of companies that promise quick fixes, but their claims are often deeply misleading. The Consumer Financial Protection Bureau (CFPB) warns, “Beware of anyone who claims that they can remove information from your credit report that’s current, accurate and negative. It’s probably a credit repair scam.”

With that said, there are some ways you might be able to avoid or reduce the credit damage that comes along with debt settlement:


If you have debt in collections, you may be able to negotiate a “pay-for-delete” solution. This strategy involves offering a lump-sum settlement in return for having the collection account deleted from your credit reports.

If you can get a pay-for-delete agreement in writing, there’s a chance the collector will remove the account from your credit reports. Just keep in mind that they can’t remove the original account from your reports, and they might not honor your agreement at all.

Also remember that you don’t have to pay any debt that doesn’t belong to you. If there’s a collection debt on your credit reports by mistake, take a minute to learn how to dispute collections and get them removed, without handing over any money.

Paid as Agreed

Another way to reduce the damage of debt settlement is to ask creditors to note the account was “paid as agreed.” In other words, your credit reports will show that you paid the full amount you agreed to pay, rather than just a portion. While this won’t erase the damage of missed payments, it might not be as harmful to your credit as a charge-off.


Re-aging is a term that can be used in several ways and, as a result, causes a lot of confusion. In the context of debt settlement, re-aging can involve having your creditors bring your account status out of delinquency and into current status. Note that this is not an option for collections.

Re-aging gives you a chance to set up a new plan and pay overdue amounts in the future.  If the creditor agrees, it won’t erase past payment history, but it can prevent future damage.

Here’s the general process to get accounts re-aged:

  1. Sign up for a nonprofit debt management plan
  2. Have your counselor negotiate with your creditors to bring your past-due accounts current. Note that the creditor might not agree.
  3. Resume on-time payments on your accounts.

If you’re looking for other ways to get current on your overdue credit card payments, take a look at a breakdown of debt hardship programs.


The truth is that there’s no way to remove accurate information from your credit reports ahead of schedule. Whether it’s missed payments or charge-offs, they’ll stay on your credit reports for seven years.

Fortunately, settling debt does not mean your credit will be in the gutter during those seven years. Negative information has less impact on your credit score over time. You can also gain points back by adding positive information to your credit reports while you wait.

Want to see what’s on your reports now? You can pull your credit reports for free from the three credit reporting agencies – Equifax, Experian and TransUnion – once a year.

How Long Does It Take to Improve Your Credit Score After Debt Settlement?

The truth is that there’s no right answer to the question, “How long does it take to improve credit score after debt settlement?”

Yes, your scores are likely to drop after you settle the debt, but you can start working to increase your credit scores right away. If you’re not sure where to start, a nonprofit credit counselor can help you explore options, including a debt management plan.

How to Improve Your Credit After Settling Debt

If you’re looking to improve your credit scores after settling debt, these are some of the best and fastest ways to gain points:

  • Ask a friend or family member to add you as an “authorized user” to one or more of their credit card accounts that are in good-standing.
  • Make a plan for paying off debt faster, which will lower your DTI. The plan could include using a debt consolidation loan or borrowing money from a loved one.
  • Review your credit reports and dispute any errors that could be hurting your scores.
  • Avoid applying for multiple new loans or credit cards. If you do want to apply, see if you can get pre-approved first.
  • Once your scores start improving, request increases to your credit card limits once a year.

Above all else, don’t forget to stay current on your bill payments. Even if you miss just one credit card payment or loan payment, it could set you way back. Your other bills could also go to collections if you fall behind.

If you’re looking for professional advice on how to get in good standing and stay in good standing with debt, a credit counselor can help.

About The Author

Sarah Brady

Sarah Brady is a Personal Finance Writer and educator who's been helping people improve their financial wellness since 2013. Sarah writes for Experian, Investopedia and more, and she's been syndicated by Yahoo! News and MSN. She is a workshop facilitator and former consultant for the City of San Francisco's Affordable Home Buyer Programs, as well as a former Certified Housing & Credit Counselor (HUD, NFCC).


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