Editorial Policy

Why is Settled Debt Still on My Credit Report?

Erica Sandberg

April 19, 2013

QDear Erica,

I did settlements with my creditors' collectors and paid out nearly $1,000. This was a lot of money to me so wanted to get it right. I got my credit reports today and the accounts are still on them. What do I do now? — Jeff

AHi Jeff,

What you ought to do now depends on when you settled the accounts. If you did it within the past few weeks, my suggestion is to redirect your attention to something more enjoyable and productive than worrying. It can take more than a few weeks for the creditor to update your credit reports.Ask Erica

I tend to be a big advocate of debt settlements because they're often beneficial for all concerned. You, as the consumer, get to pay less than you actually owe, while the collector gets some of the amount owed. Most settlements are done with collection agencies instead of original lenders (like credit card companies) or businesses (such as doctors' offices). These third-party collectors buy debts for a fraction of their true cost. As long as the debtor pays more than their purchase price, they come out ahead and everyone is happy — except the original lender, and that milk has already spilled.

To set up a settlement, all you have to do is communicate with the entity holding the debt and work out a deal you both can live with. It's always best to negotiate in a documented way — email or letter — because you'll have proof of what was agreed upon. However, if you spoke over the phone and didn't receive a confirmation that they would consider your payment a settlement and that no more money would be expected, you could be in for a fight. It will be your word against theirs.

Assuming that you did it right, you are in a fine position. I understand your concern, but give the collector time to update your credit reports. They should send notice to the three bureaus within a month or so. After that, check your reports again. The debt in question should be notated as something like, “settled for less than the full amount due” or “partial payment accepted.” Such wording will be a clear indication that you no longer are responsible for paying the account. However, it will remain on your credit report for seven years from the date the creditor reported it as settled. Future creditors won't consider it as positive as accounts that you have paid in full, but that's the price you pay for saving money.

In the event the account does not show up as settled, contact the collection agency again. I hope you'll have proof of the deal, and that will be enough to get them to take swift reporting action. If you don't have proof, and they say they have no idea what you're talking about and that you need to cough up the remainder, contact the Federal Trade Commission and file a formal complaint.

Most of the time, these settlements go off without a hitch, so I have a feeling that you just didn't wait long enough for the changes to appear.

Now if you want to build up your credit after all this, great. You can achieve that goal by charging with whatever active credit accounts you have and paying the balance in full and on time. In a year to so, your positive behavior will overshadow the problems of the past. If you don't have any open credit cards, you can apply for accounts that are designed to help people rebuild their credit history. Many are secured by a cash deposit, so qualification requirements aren't as rigorous as they are with unsecured accounts.

You can avoid this situation — and debt collectors — entirely in the future by paying all your bills on time. Settlements don't help your credit, and, as you've learned, they can take time and energy to work out.

Got a question for Erica? Send her an email.