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How Missed Payments During Settlement Affect Your Credit

Settling a debt for less than you owe can negatively impact your credit, but missing payments during the settlement period can make matters worse. This article explains how missed payments affect your credit score and report so you can minimize damage.

The Settlement Process

When you settle a debt, you agree to pay the creditor or collection agency a lump sum that is less than the full balance owed. The creditor accepts this lesser amount as payment in full. Settlements often save 30% to 50% off the original debt.

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Settlements require either a lump sum payment or installments over a set timeframe, usually 3-6 months. You stop making regular payments on the debt when settlement begins. Any missed payments during settlement can hurt your credit.

How Missed Payments Hurt Your Credit

Payment history is the biggest factor in credit scores, accounting for 35% of your FICO score. Every late payment can lower your score, especially if you previously had no late payments.


  • A 30-day late payment can drop your score by 60-110 points
  • A 60-day late payment can drop your score by 90-150 points
  • Payments 90 days late or more can drop your score 130+ points

One late payment may not devastate your credit, but several missed payments during settlement will cause significant damage. Delinquent accounts also get sent to collections more quickly.

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Late Payments Stay on Your Credit Report

Late payments remain on your credit report for seven years. Settling the debt won’t remove the late payments. They will continue lowering your credit score until they naturally age off your report.

You can try disputing errors with the credit bureaus, but they likely won’t remove accurate late payments. Your best recourse is waiting out the seven years for the marks to disappear.

Your Credit Utilization Increases

Credit utilization is the percentage of your total available credit that you are using. This factor accounts for 30% of your credit score.

When you stop making payments during settlement, your balance remains the same while your available credit drops. This causes your credit utilization to increase, further lowering your scores.

For example, if you owe $5,000 on a card with a $10,000 limit, your utilization is 50%. If you stop making $200 monthly payments during a 5-month settlement, your balance remains $5,000 but your available credit drops to $9,000. Now your utilization is 56%.

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You May Face Penalties

Creditors can charge late fees during settlement – often $15-40 per missed payment. Interest may also accrue at a penalty rate, increasing the settlement amount.

If you breach the settlement terms, the creditor can resume collection on the entire original balance. Read the settlement terms carefully.

Your Credit Score Starts Recovering

The damage from missed payments during settlement is not permanent. Your credit score will gradually improve after settlement if you make all other payments on time.

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  • Late payments hurt less with time – After 2 years, the impact decreases
  • Your utilization improves when the account closes
  • Having no new late payments helps your score rebound

Most negative information disappears from your report after 7 years. Within a few years of settlement, you can rebuild your credit.

Strategies to Minimize Credit Damage

You can take steps to reduce the credit impact of settlement:

  1. Ask creditors not to report missed payments during settlement. They aren’t required to agree, but it’s worth asking.
  2. Settle for a lump sum rather than installments to shorten settlement period.
  3. Wait to start settlement until you have the full amount saved up.
  4. Prioritize paying debts that are not in settlement first.
  5. Pay more than the minimums on other debts to keep utilization low.
  6. Avoid applying for new credit until score rebounds.

When to Consider Debt Settlement

Despite the credit consequences, settlement can still be the best option in certain situations, such as:

  • You can’t realistically pay off debt through a debt management plan
  • Bankruptcy isn’t right for your situation
  • You have a large amount of unsecured debt, like credit cards or medical bills
  • You have recently lost income and cannot keep up with payments

A reputable settlement company can help you decide if it’s the right debt relief option for your unique financial situation.

Alternatives to Debt Settlement

Other ways to repay debt without settlement’s credit consequences include:

  • Debt management plans: Make one monthly payment to a credit counseling agency, which distributes payments to your creditors. Often lowers interest rates.
  • Balance transfer credit cards: Transfer balances to a card with a 0% intro APR to pay down debt faster without interest.
  • Debt consolidation loans: Combine debts into one new loan with lower monthly payments. May require collateral.
  • Credit counseling: Nonprofit credit counselors can help you organize finances and negotiate repayment plans.

Each option has pros and cons to weigh against your financial situation. Consulting a credit counselor is recommended.

Rebuilding Credit After Settlement

Here are important steps to rebuild your credit after settlement:

  1. Pay all bills on time – this includes utilities, rent, car loans, etc.
  2. Keep credit card balances low.
  3. Wait 6-12 months before applying for new credit.
  4. Become an authorized user on someone else’s credit card.
  5. Only apply for credit you need – every application causes an inquiry.
  6. Check your credit reports and dispute any errors.

With diligent credit management, your scores can quickly rebound after settlement’s damage. Be patient and let time heal the late payments.

The Bottom Line

Missed payments during debt settlement can significantly hurt your credit, especially if you were previously in good standing. Work to minimize damage through lump sum payments and keeping other accounts current.

While alternatives like debt management plans avoid late payments, settlement remains the right option for some situations. Rebuilding credit just takes time after settlement. If you stay on top of future payments, your credit will recover.

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