Full Name

Day Phone

Mobile Phone





How is debt settlement reported?

By Leslie McFadden •

Leslie McFaddenQ:   Dear Credit Card Adviser,
This morning’s New York Times had an article about how credit card companies are dropping the balances owed by customers who call in. CNBC talked about it quite a bit, too.

I called a credit card company to see if I could drop a balance and what I would need to do. I also asked if this could negatively affect my credit … which it can.

I’m not interested in doing this without knowing if it will hurt my credit score.

Do you have any information as to what these credit reductions look like on a credit report, or how much they can affect a credit score?

– Michael H.

A:  Dear Michael,

That article refers to debt settlement, an agreement where the lender accepts less than the outstanding balance on a delinquent account as payment in full.

The move saves money, but will leave a scar on your credit report. How that mark shows up can vary across the credit reporting agencies, but the notations for settlement are similar, according to Barry Paperno, consumer operations manager at FICO, the Minneapolis company that created the ubiquitous credit scoring formula.

Paperno says a typical description is “debt settled for less than the full amount due.” Other phrasings may include key words such as “partial payment accepted,” “settled” or “settlement.” The credit bureaus differ in how they format credit reports, but the description for settled accounts will appear in the same section where comments such as “this account is in dispute” or “closed by credit grantor” appear.

Any negative payment history associated with the account will remain. The account should show an updated balance of zero, and the date the settlement status was added to the report.

The scoring formula will interpret any terms indicating settlement as negative. “It is considered negative to the same extent as a charge-off or an account included in bankruptcy or repossession or something of that nature in which the lender took a loss on the debt,” says Paperno.

For accounts with a negative status, the most recent one matters, as well as the worst offense. A settled account that was previously charged off could still damage the score because it’s more recent than the charge off, even though the severity of the status is the same.

How much settlement harms your score depends on everything else in your credit history. “If it’s got a lot of company in terms of other delinquent accounts, there’s going to be less of an impact than if it’s the only negative item, for example, on an otherwise stellar credit report,” Paperno says.

For more information about debt relief options and the cost to your score, visit our Debt Management page on

Read more columns by the Credit Card Adviser.

RMCN Credit Services
375 Adriatic Parkway #2205
McKinney, TX 75072
(972) 529-0900 Office (972) 562-0225 Fax
Se Habla Español