Between the two, it's always better for your credit scores to have debts listed as paid in full on a credit report. Even if you have one or two late payments for the account on your credit history, paying the debt in full sends the signal to lenders that you follow through when it comes to paying back what you borrow.
Debt Settlement Will Most Likely Hurt Your Credit Score
Debt settlement is likely to lower your credit score by as much as 100 points or more.
Settling or paying off collection accounts can be better for your credit scores than having an outstanding past-due balance on an account. And newer credit scoring models ignore collection accounts that are paid in full.
It's important to note, though, that while the settled account remains on your credit report for several years, the impact that a settled account has on your credit score typically diminishes over time.
It's better to pay off a debt in full than settle when possible. This will look better on your credit report and potentially help your score recover faster. Debt settlement is still a good option if you can't fully pay off your past-due debt.
You must pay the remaining balance on your loan and obtain an NOC (No Objection Certificate) from the lender in order to remove the 'Settled' status from your CIBIL report.
For example, paying all bills on time, finding the best credit cards for those with poor credit scores, or pursuing a credit builder loan. In most instances, reasonable expectations for a post-debt settlement recovery range from approximately 12 to 24 months.
Your credit score may drop after you pay off debt because the credit scoring system factors in things like your average account age and credit mix. If you applied for a loan to consolidate debt, the lender's hard credit inquiry can also ding your score.
Establish a better credit score: Using your credit card and repaying your balance will help you establish a good payment history. When you pay your credit card balance in full, your credit score may improve, which means lenders are more likely to accept your credit applications and offer better borrowing terms.
“Loan settlement” is not “loan closure” and must be avoided until necessary as it indicates an inability to pay your debts completely and on the stipulated time. Thus, it negatively affects your credit report and credit score, which in turn can make it difficult for you to secure credit in the future.
The bottom line. The journey from debt settlement to homeownership is typically a matter of years rather than months. While the exact timeline can vary based on numerous factors, most individuals should expect to wait at least 2-3 years, with 4-7 years being more common for conventional loans.
For instance, if you've managed to achieve a commendable score of 700, brace yourself. The introduction of just one debt collection entry can plummet your score by over 100 points. Conversely, for those with already lower scores, the drop might be less pronounced but still significant.
So, while you can use your credit card accounts after consolidating your debt in most cases, it could be a bit more difficult to open and use new credit cards — and the route you take to consolidate your debt could play a role as well. Learn how the right debt relief strategy could help you now.
You can improve your credit score after settling a debt by practising responsible financial behaviour, paying bills on time, changing "settled" accounts to "closed," and clearing outstanding dues on loans and credit cards.
It's best to pay a charge-off in full rather than settle an account. Remember, settling an account is considered negative because you're paying less than you owe. Consequently, settling an account is likely to harm your credit scores. Still, it's even worse to leave a debt entirely unpaid.
A FICO® Score of 650 places you within a population of consumers whose credit may be seen as Fair. Your 650 FICO® Score is lower than the average U.S. credit score. Statistically speaking, 28% of consumers with credit scores in the Fair range are likely to become seriously delinquent in the future.
Making on-time payments to creditors, keeping your credit utilization low, having a long credit history, maintaining a good mix of credit types, and occasionally applying for new credit lines are the factors that can get you into the 800 credit score club.
Credit Score Damage: One of the major downsides of debt settlement is the negative impact on credit scores. The process can lower a credit score by 100 points or more, depending on the individual's credit history. This can make it harder to qualify for credit, loans, or favorable interest rates for several years.
Typically, debt collectors will only pursue legal action when the amount owed is in excess of $5,000, but they can sue for less. “If they do sue, you need to show up at court,” says Lewis-Parks.
How long do settled accounts stay on your credit report? Settled accounts stay on your credit report for seven years from the date of your first late payment, which puts you into delinquent status.
This is intended to warn other potential lenders that you've been unable to keep up with your contractual obligations, and it can have a seriously negative effect on your credit score. So seeing 'settled' in your credit file is a good indication that you've repaid in full without any adverse issues.
So, does debt settlement affect mortgage approval? Yes, it does, but the good news is that these challenges are just for the time being, and once you've waited for a specific period, you can get a mortgage loan and buy a house.