How will a settlement affect my credit score?

[O’gara]

I have a collection account for around 3k from an old medical bill that went unpaid because it was never sent to me.

I’m currently in the process of negotiating a settlement. They promised me my score will improve after we’re done, but I wanted to ask if anyone has experienced a settlement with a collection company.

Can I trust what they say? How will a settlement affect my credit score?

[Jamaal]

Never trust a collection company

Collection companies are notorious for not standing up to their words. Whatever you do, never pay a cent before they send you a SIGNED agreement!

[Salzo]

It depends on how they report

The affect a settlement can have on your credit score depends on how they report it to the credit bureaus.

Normally, a settlement is considered by FICO as “not paid as agreed” account, which is pretty bad. This means that even after you pay you won’t see your score going up. In fact, it can even drop lower because the account date will update, making it a younger negative account.

On the other hand, the collection company (or any other entity you owe money to) can report the account as “paid“, “paid in full” or “paid as agreed“. All are good for your FICO.

Another option is “pay for delete”. In a PFD agreement the creditor agrees to delete the account entirely from the report it send to the credit bureaus in return for you paying the account in full. I’m not sure if this practice is fully legal (with respect to the contract between the collection company and the credit bureaus), but that’s not your problem. If they agree – good for you. If not – go for a settlement.

Lastly but most importantly – whatever you negotiate with them, make sure they send you a signed agreement before you pay a cent. Also, make sure everything is properly documented.

See How to Pay Off Debt for more information.

[Danielle]

I think you should see this post. It explains everything!

[Author]

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