2020 Guide: How to Settle Debt and Remove from Credit Report

Settling debt is crucial to ensure financial health and maintain a healthy credit score. It refers to reaching an agreement with your creditors by partly paying back your debts and seeking the remaining amount to be forgiven. If you’re considering how to settle a debt and remove it from a credit report, you’ve probably missed several payments on your credit card or mortgage loan.

This article will walk you through a comprehensive guide on settling debt and having it removed from your credit report. Here’s everything you need to know.

Can You Remove Settled Debts from Your Credit History?

You most certainly can! This requires you to come to an agreement with your creditor on settling an amount that is within your financial reach and negotiate for a substantial amount from your debt to be forgiven.

Negotiating with your lender

As part of the settlement negotiations, you can approach your lender with the proposition of removing the settled debt from your credit report or reporting your account as ‘paid in full.’ In exchange, you can offer to increase the amount you are willing to pay to settle the debt.

How Do I Remove Other Negative Items from My Credit Report?

If you have unpaid debt, it can seriously affect your credit score by adding negative items to your credit report. Statistics shared by FICO reveal that 30% of the credit score is influenced by the amount that we owe on our existing accounts.

Fair Credit Reporting Act

All the late payments we make on our debit and credit card bills are duly reported to the credit bureaus by our creditors and lenders, which is why our credit score is reflective of all such delinquencies.

However, the Fair Credit Reporting Act offers coverage and leniency to people who are burdened with financial challenges and cannot effectively repay their debt. Negatives about your credit that are over seven years old or caused by bankruptcies more than ten years old cannot be reported as negative information to credit bureaus.

You don’t have to wait for seven years, and in most cases, you can effectively remove settled accounts from your credit report.

Settling your debt

Why would your lender be willing to settle for less money than the entire amount that is owed? In most cases, lenders are hesitant to initiate costly and lengthy court proceedings. They are focused on getting back some of their money as opposed to nothing at all.

They also understand that many of their clients fail to return their debt due to bankruptcy, in which case they might not be able to recover a single cent.

Debt Collection is Costly

Debt collection is costly for lenders and financial institutions, which is why they are likely to be inclined towards settlements. If they choose to sue you for debt payment, the process will be costly and lengthy. Most people seek to work with debt settlement companies to negotiate effectively while settling debts with creditors or debt collection agencies.

Why Should You Never Pay a Collection Agency?

Debt collection agencies are highly unlikely to settle towards a partial payment as their interest lies in recovering the entire amount. They possess the resources and the means to drag you into a lengthy court proceeding and are likely to undertake heavy-handed intimidation tactics.

It is crucial to avoid engaging with a debt collection agency and, instead, contact your credit card company or lender directly to work on a flexible payment plan. This process will not be easy, but it is the ideal course of action. Focus on working out a settlement that is favorable for both you and the lender.

Can I Pay the Original Creditor Instead of a Collection Agency?

It is strongly advised to work closely with your creditor instead of letting matters go unattended by avoiding your creditor’s calls and emails. Your creditor is only likely to reach out to a debt collection agency if you remain unresponsive for over 180 days. The creditor can either sell your debt to a debt collection agency or file a lawsuit against you.

It is wise to negotiate with your creditor and work towards a settlement that allows you to settle your debt and urge your creditor to forgive a certain amount in light of your financial situation.

How Do I Remove Negative Items from My Credit Report Before 7 Years?

Negative items typically stay on your credit report for seven years or more. There are very few strategies that can help you remove these negativities from your report. They require your creditor's cooperation. Therefore, it is crucial to avoid ignoring your creditor and maintain communication so you can negotiate a favorable settlement and reduce the negative impact on your credit report.

Pay for Delete

Asking your debt collector or creditor for pay for delete as part of your debt settlement negotiation is a wise strategy to remove negative items from your credit report. Pay for delete refers to asking your creditor to agree to report your account as ‘paid in full' or request them to have it deleted from your credit report entirely.

In exchange for this favor, you can agree to pay considerably more than the amount you're offering as part of the debt settlement. Credit card providers, banks, and other lenders are unlikely to agree to this term. However, it can work with your utility and medical collections. 

Can Paying Off Collections Raise Your Credit Score?

Paying off debt collections will not remove it from your credit report or raise your credit score. You see, the paid collection item will remain a fixture on your report for seven years from the original delinquency date, which is the date when you missed your first payment. However, as time passes, this settlement will carry less weight and impact on your credit score.

Typically, debt settlement companies advise their clients to avoid making regular payments and make a lump sum payment instead. That is terrible advice that should not be followed as it can further reduce your credit score. It is ideal to avoid opening up multiple delinquent accounts and focus on paying all your bills and payments on time.

How Long Does a Debt Settlement Stay on Your Credit Report?

A debt settlement will remain on your credit report for seven years from the original delinquency debt, or longer if you cannot effectively make timely settlement payments. If you settled your debt five years ago, you would have to wait for the seven years to be completed.

It is crucial to note that the credit report presents a history of managing your credit accounts. When a debt is paid off and an account is closed, the lender updates the report's new payment status. However, paying off an account and closing it does not change its status on the report immediately.

Is It Better to Pay Off a Debt or Settle?

If you have the financial means to pay off your debt entirely, it is an ideal solution to ensure that your credit report does not take a hit. However, in some cases related to financial challenges and possible bankruptcy, debt settlement is the ideal course of action to ensure debt relief.

Debt Settlement for Effective Relief

Debt settlement is widely advised for effective debt relief. Unfortunately, it can leave a negative mark on your credit report, affecting your ability to undertake a loan or obtain credit for several years.

Even if you manage to settle your debt in good standing, it will remain a fixture on your credit report for seven years. If you are not careful and mindful about managing your settlement payments, it can remain on your report for even longer.

So, your ability to settle or pay off the amount depends entirely on your financial condition and capabilities.