To put the settlement process in motion, the majority of banks require that an account be delinquent, meaning that several monthly payments have been missed. If you have a credit card account that has been reported to any of the three big credit scoring agencies as delinquent, your credit score will suffer as a result. The more payments that have been missed, the worse off you score will be.
As soon as a negotiated settlement is reached, the bank will issue a report to the credit bureaus that the account has been “paid, settled for less than amount owed.” The ideal situation would be to have an “account paid in full” notation on your report, which would result in the most positive impact upon your score. However, your credit score will edge upwards as a result of settling an account. This is true even if the amount settled for is less than what was originally owed because settling is better that having an account that is outstanding or delinquent.
Most importantly, what you want to have on your credit report is an indication that the item has been paid. Make certain that you negotiate for this to happen with your creditor as a part of the settlement. Even better, you should attempt to have them delete the item altogether once you pay the settlement amount. Should the creditor agree to the deletion, be sure to get their agreement in writing.
It is helpful to know that activity on your credit report is ranked in accordance to how current it is. If your aim is to spruce up your credit score prior to attempting to secure a loan, it is best not to pay on any outstanding debt that has sat inactive for longer than two years. This is because making a payment on long-inactive accounts will rank the account as current on your report and will likely have a negative impact upon your score. If you are simply looking to clean up your credit history in order to be considered more creditworthy in the future, then go ahead and pay off any charged off accounts that are lingering on your report.
Finally, if you are weighing debt settlement as an option, is it perhaps wise to consider whether or not lowering your credit score temporarily in order to settle an old, delinquent account is worth your while. If your delinquent debt is a considerable amount and agreeing to a settlement on the account will save you a tremendous sum of money, then it could very well be worth taking a hit to your credit score in order to settle the debt.