How Long Does Debt Settlement Stay On Your Credit Report?

The world of credit is often a very confusing place. As so many companies now offer credit agreements, instead of upfront payments, it can be very easy to get yourself into a bad financial position.

Credit can quickly build up, and then it can be easy to fall behind on payments, which will often result in defaults and debt. 

If you are someone who has struggled with debt in the past, then it can sometimes be tricky to get your hands on further credit agreements. Even once debts have been settled, these past experiences will still show up on your credit report, which can deter lenders from accepting your application. 

How long does Debt Settlement stay on your Credit Report?

So, you might find yourself wondering, ‘how long does debt settlement stay on your credit report?’. In this guide, we’ll be answering these questions and giving you lots of information about debt settlement and credit scores.

Read on to find out more.

What is a Debt Settlement?

Before we go any further, it is important that we first establish exactly what a debt settlement is. As we have said, the world of credit can be very confusing, and this is partly because of the seemingly unending jargon that comes with it. 

A debt settlement occurs when an outstanding debt by an individual has been settled with the lending agency. In most cases, a debt will be settled when the lender accepts that the borrower will repay less than their outstanding balance.

When lenders give money to individuals, they know that there is a relatively high chance that the full amount (interest included) will not be repaid. So, they are willing to settle. 

Usually, when this occurs, the debt will have a negative impact on the borrower’s credit score.

A settled account will be viewed more favorably than an outstanding debt, but it will still be seen as a negative because you failed to repay the amount that you agreed to.

While you may set out with the best intentions to repay your loan, sometimes you will have no choice but to settle.

Debt Settlement vs Credit Counselling

Like we have said, one of the most confusing things in the world of credit and debt is the jargon.

Two pieces of jargon that people often confuse is debt settlement and credit counselling, so what is the difference between the two? Let’s take a look. 

Even though they sound similar, debt settlement and credit counselling are two very different things. Credit counselling is something that you might be offered by a lender if you are struggling to manage your finances.

It can help you learn how to manage your debts, and it can also give you advice on the best way to pay them off. You might be advised to take credit counselling by your lender if you are on the way to being overwhelmed with debts. 

Whereas, debt settlement is very different. Debt settlement companies are usually a completely independent body which will step in to help individuals reduce their outstanding debts.

A debt settlement company will step in for a lender and negotiate a resolution for a borrower’s outstanding debt.

When this service is offered, it is implied that it is beneficial for all parties involved, but a settlement will always have a negative impact on the borrower’s credit report.

How long does a Debt Settlement stay on your Credit Report?

So, now that we know exactly what a debt settlement is, you probably want to know how long it will stay on your credit report for.

Every single financial action that you complete will be reflected on your credit report, both good and bad, so any credit that you have ever taken out will be on here. So will any unpaid debts. 

Depending on the history that you have with credit, the effect that a settlement may have will be very different. If you have a history of unpaid debts, then one being settled could actually look good for you. But, if your previous credit history is pristine, a settlement could reflect badly on you. 

The main thing to remember when it comes to credit reports is that they are ever-changing. Past financial mistakes will stick around for a while, but they won’t be on your credit report forever. In fact, any settlements that you make will only stay on your credit report for 7 years.

So, even though settling could immediately have a negative impact on your credit report, in the long run it would be beneficial as a resolved credit is viewed more favorably than an unresolved one.

But, before you do anything, it is best to speak with a financial advisor to assess the best route to go down.

How to Improve your Credit Rating

There is no denying that debts will have a negative impact on your credit rating. So, if you do settle a debt, it is best to get started on improving your credit rating right away. Even though it sticks around for 7 years.

In the first few years, once the debt has been settled, you might be viewed badly but credit agencies. But, as the years pass, this will become less important. It will become even more unimportant if you take steps to improve your credit rating. 

If you want to improve your credit rating, there are lots of ways that you can do this. Here are just a few steps that you can take to make it better:

Pay off any Debts – If you are resolving one debt, it is best to do it all at once, so that you will only have positive credits left on your report. 

Keep on top of your Payments – It is also very important that you never fall behind on any of your monthly payments if you want your credit score to be good. 

Sign up to a Credit Rating Agency – Finally, sign up with a credit rating agency like ‘Experian’ as this allows you to view your credit report and see how you can improve it. 

Summary

In short, debt settlements will stay on your credit report for 7 years after they have been settled. But if you actively work to improve your credit score, these settlements will be seen as less important by credit agencies.

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