One of the most common mistakes consumers make is settling debts for less than what is owed without fully assessing how that account is reporting on your credit. For example, what is the Date of Last Activity (DLA) for the unsettled debt? The DLA determines when the account will cease to report on your credit – i.e. 7 years past the (DLA or last payment). Once you make a payment to settle an unpaid debt, the DLA changes to the date paid so the clock starts all over again and the debt has 7 years before it will stop reporting on your credit. It may be prudent not to settle debts that are close to 7 years from the (DLA) as they will fall off of your credit soon.
Although settling debts is not an ideal option, once the account is in collection status, the damage is already severe and the Past Due balance and Late Payments reporting can really negatively impact your credit scores if allowed to continue. Settling a debt is one way to “stop the bleeding” even though the ‘settled’ indicator in a credit report is actually derogatory. The only way to avoid the damage to your credit scores is to arrange a deal with the lender to report the account as ‘paid in full’ as opposed to ‘settled’ or ask them to delete the account after settlement. I’ve also found that once a debt has been settled, the creditor may not respond to credit disputes and that could result in the deletion of the account!