Can A Settled Account Be Removed From Your Credit Report?

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manny

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Published on January 21, 2021

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Credit Report Dispute Form Insurance Concept

It’s good to be doing well financially and be able to settle your debts. You know that your debts are recorded in your credit report. Can it be removed when you’ve settled the account? That’s a common question.

Yes, you can remove a settled account from your credit report. A settled account means you paid your outstanding balance in full or less than the amount owed. Otherwise, a settled account will appear on your credit report for up to 7.5 years from the date it was fully paid or closed. However, if you had late payments or delinquencies before settling the account, the settled account will be removed from your credit report 7 years from the original delinquency date. 

You can file a dispute with the major credit bureaus to have the settled accounts removed from your credit report if they’re already past the 7-year limitation. You can also get in touch with the collection agency and ask for a goodwill adjustment. Other than that, all you can do is wait it out because credit bureaus will only delete your settled account once they’re required to do so by law.

Will Settled Accounts Affect Your Credit Score?

Accounts that were settled in full remain on your credit report for 10 years and will leave a positive mark on your credit. You can also settle an account when you pay less than the amount. It will remain on your credit report for 7 years and may affect your credit score. A settled account means you paid less than the actual amount owed. Since you didn’t pay back the debt in full as agreed when you took out the loan, you have failed to meet the terms of your loan contract, thereby causing a negative mark on your credit report.

How does a credit card settlement affect your credit score? Closing a credit card account after settling your outstanding balances may negatively affect your credit report since it will lower your overall available credit limit and increase your credit utilization ratio. Furthermore, your credit score goes down because you only paid a portion of your credit card debt. 

However, if you paid your balances in full and decided to close the account, your payment history will still appear on your credit report. Provided that there are no late or missed payments, it won’t affect your credit score negatively and lenders will consider you as a creditworthy and low-risk borrower.

Debt settlement is an option that you may consider if you have an unpaid debt and you can only repay the creditors with less than the total amount owed. Debt settlement firms offer services, which you have to pay, to help you negotiate a lower balance with your collection agencies or creditors.

Debt settlement can help lower the amount of debt you need to pay and help you avoid bankruptcy. Even though there’s a risk that lenders may not agree with the debt settlement, some may take the offer of a lower payment amount so they could recoup part of their losses.

Why Should You Settle An Account?

Always remember that having unpaid debts will negatively affect your credit score. You’ll be considered as a high-risk borrower, which means lenders will assume that you’re less likely to pay back the amount they lend you. It would also likely mean a higher interest rate even if you obtained the loan, due to the perceived risk to the lender. 

Settled accounts may harm your credit history but their effects are minimal compared to having an unpaid debt listed on your credit report. Creditors will look at credit reports with settled debts more favorably than those with unpaid debts. Having a settled account may lower your credit score now but its negative effect will lessen as time goes by. 

Settling an account, such as a credit card, in full and closing it for some reason, such as not wanting to use it anymore, can still help you. Your payment history on that particular account will still appear on your credit report, which lenders can use as a reference.

How to Remove Settled Accounts From Your Credit Report?

You can remove settled accounts from your credit report before the 7-year rule.

Before you do anything, you should first assess if the settled account negatively affects your credit score or it’s just showing your payment history.

Keep in mind that your payment history affects your credit score. A settled account that appears on your credit report as part of your payment history may help boost your credit score in the long run since it shows that you’re a low-risk borrower.

Look for Inconsistencies and File a Dispute

Filing a dispute for inconsistencies relating to your settled accounts can help remove it from your credit report. Be sure to check your credit report regularly to spot any inaccuracy. Under federal law, you can dispute any incorrect information on your credit report for free. File a dispute with the major credit bureaus (Equifax, Experian, TransUnion).

Steps for filing a dispute:

  • Send a detailed dispute letter explaining the reason for the dispute and identifying the points you believe are incorrect. 
  • Include a copy of your credit report with the incorrect items highlighted.
  • If you’re sending the dispute letter by mail, make sure to ask for a return receipt so you’ll have proof that the credit reporting company received your letter.
  • Credit reporting companies have 30 days to investigate your claim. Your dispute will then be forwarded to their information provider for review. 
  • If it proves that your claim is true, it will notify the credit bureaus so that they can remove the incorrect information. 
  • You’ll be informed about the result of their investigation via mail.

Seek Goodwill Adjustment

You may also consider a goodwill adjustment to remove a settled account on your credit report. It involves sending a goodwill letter to the creditor or collection agency requesting the removal of the negative mark on your credit report. The creditor may consider your request out of goodwill especially if you have a good credit history.

Remember that you’re making a request and there’s a timeline requirement for a goodwill letter. Therefore, the creditor or collection agency is under no obligation to approve, deny, or respond to your letter at all.

Wait It Out

If the above options aren’t applicable, then you’ll just have to wait for the settled account to be removed from your credit report after 7 years.

What is the Difference Between Paid in Full vs Settlement On a Credit Report?

Paid in Full Accounts

You’re probably familiar with the terms paid in full and settlement. Some people use these terms interchangeably, but they have different meanings.

A paid-in-full account means you’ve paid the entire amount owed and interest. If you had no missed payments, the paid-in-full account will remain on your credit report for 10 years. It will help improve your credit score, and it will show lenders that you’re a responsible borrower. That will make you an appealing applicant if you decide to apply for a loan.

Settled Accounts

Meanwhile, settled accounts on a credit report mean you have paid less than the whole amount and interest owed. Since you failed to pay your debt in full, a settled account will have a negative effect on your credit report. You’ll see the “settled” mark on your report for 7 years. If you had no delinquency, the settled status will appear on your credit report from the settlement date. If you had missed payments, the settled status will remain on your credit report from the first missed payment.  

Even though settled accounts leave a negative mark on your credit report, its impact is much less than the effects of leaving a debt unpaid.

How Can You Improve Your Credit After Settling a Debt?

A settled account may have a negative impact on your credit report but there are ways you can take to start rebuilding your credit.

  • Pay your debt – Pay as much debt as you can.
  • Pay your bills on time – Lenders favor applicants who are reliable when it comes to paying bills. Creditors will consider you as a low-risk borrower if your credit report shows that you make timely payments. You’ll have higher chances of getting approved for a loan, better interest rates, more rewards, and incentives if you’re applying for a new credit card.
  • Apply for new credit only when necessary – Don’t apply or open new credit if you don’t have to. Always remember that a new credit application triggers a hard inquiry on your credit report, which isn’t good for your credit score.
  • Keep unused accounts open – Don’t close credit card accounts even if you’re not using them, provided that you’re not paying any annual fee. If you’re paying an annual fee and you think it’s not worth it, call the creditor and ask if they can waive it. If not, ask for retention offers, such as additional rewards or a statement credit. If you don’t get an offer, ask if they can downgrade your current credit card to a different one that has no or lower annual fee.  Closing unused accounts will increase your credit utilization ratio, which will harm your credit score.  
  • Keep a low credit utilization ratio – How much of your available credit you’re using plays a role in the calculation of your credit score. Paying off your credit card balances in full every month or keeping your outstanding balances low will help boost your credit report.
  • Check your credit report regularly – You can get free copies of your credit report from the 3 major credit bureaus annually. Make sure to check them for inaccuracies that may drag your credit score down. If you notice any errors, file a dispute right away before it wreaks havoc on your credit report.

How Long Will it Take to Rebuild Your Credit Score?

There’s no quick fix for poor credit. You need to follow the tips above and develop good borrowing habits. Avoid adding any negative mark to your credit report such as late payments, applying for too many new credits, or filing for bankruptcy. 

Conclusion

Everyone wants to have at least a good credit score. But there are instances when that’s not possible. If a settled account is barring you from getting a favorable credit score, you need to look into it closely to determine if there’s anything you can do to remove it. You can remove a settled account that’s past the 7-year rule from your credit report. If it still appears on your credit report, then you have to file a dispute with the credit bureaus to delete it. Be on the lookout for errors, too. You may also consider sending a goodwill letter to your creditor and request to remove the settled account or wait it out until the 7-year limit is over.

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