Your credit score has been dropping and upon investigating it appears that your score is being affected by an account settled or closed months ago.
Don’t worry, this isn’t an error.
Settled accounts can appear and affect your credit score and report for up to 7 years.
For more information on settled accounts and what actions you can take to remove them from your report, keep reading below to learn how to remove settled accounts from credit reports.
What Are Settled Accounts?
A settled account is an account that has been fully paid or closed.
Types of settled accounts can be a loan that was paid in full or a closed credit card account.
Settled accounts can also be known as collection accounts.
These accounts can appear on your credit report for up to 7 and a half years from the date it was paid in full.
If you have any delinquencies or late payments, then the settled account will appear on your credit report for 7 years from your first delinquency or the original delinquency date.
What Happens When an Account Is Closed?
When you pay off or close an account it’s not available for purchases or payments.
An account can be closed for many reasons such as paying off the amount borrowed or closing an unwanted line.
Once the account is closed, it’s then settled and will appear on your credit report as such.
When an account is closed with a balance, the creditor will still report the status and account details to the credit bureaus on a monthly basis.
The information that is reported is the balance, monthly payment history, and the date of your last payment.
How Do Settled Accounts Affect My Credit Score and History?
If you settle an account for anything less than the full amount owed to the borrower, then there will be negative impacts on your credit score.
This is because you did not pay back what was taken and are most likely breaking a contract you signed stating you would pay the amount back in full within a certain amount of time.
If you close an account like a credit card and it has been paid off, then your credit score can also be negatively affected.
Your credit score is based on available credit, payment history, and the age of your accounts.
Since you are taking away an account that affects your available credit, this limit will be lowered, causing a drop in your credit score.
When it comes to loans that you have paid in full with no late payments, these will still appear and affect your credit history.
A history of your payments will remain on your credit report for 7 years for reference.
This will not lower or heighten your credit score.
How to Remove Settled Accounts from Credit Reports
How to settle the outstanding account and remove it from a credit report can be tricky because some accounts can only be removed in specific situations.
You must also look at if the account is affecting your score negatively or if it’s just hanging out and showing your payment history.
If the account has no direct effect on your score, it’s a good idea to leave it alone.
Settled accounts that provide payment history can actually be helpful in the long run and make your credit score rise.
This will show that you have a good history of payments and aren’t a risk to any finical situation.
As for the accounts that affect your score negatively, there are ways to remove them before the 7 years are up.
Why Should You Settle An Account?
It’s important to remember that having unpaid debts will affect your credit score in a negative way. Creditors will consider you a high-risk borrower, which means these lenders will assume that you’re less likely to pay back the amount you borrow from them. There’s a good chance you’ll end up with a higher interest rate when you obtain the loan too. Lenders use this additional interest to account for the perceived risk of lending to you.
Settled accounts may harm your credit history but their effects are much less averse when compared to listing an unpaid debt on your credit report. Creditors will look at credit reports with settled debts more favorably than those with unpaid debts. Settling an account may lower your credit score in the short term but its negative effect will lessen as time goes by.
Settling an account, paying it in full and closing it may help your credit score. Your payment history on that particular account will still appear on your credit report, which lenders can use as a reference to determine your ability to pay back debts.
How Many Points Can My Credit Score Increase If I Settle My Debt?
When collection accounts are removed, credit scores may increase. Collection accounts hurt when they stay on your credit report.
The effect of removing a collection account depends on a number of different factors. Late payments and collection accounts makeup roughly a third of your FICO score and removing a collection account often makes a difference.
If you can’t remove an account, it’s not the end of the world. As collection accounts age, they have less of an effect on your credit score.
Review Your Debt Settlement Options
It’s important to consider the different ways you can settle debt and square your credit away to improve your score.
Credit bureaus aren’t allowed to report inaccurate or incomplete information. If any of the information you see on your credit report is inaccurate or incomplete, you have the right to challenge the accuracy of that item. When they receive challenges, credit bureaus have between 30 and 45 days to investigate and confirm and/or update the information they hold on file about you.
If the collection item or debt in question on your credit report isn’t yours, you shouldn’t pay it. Ask the credit bureau to remove it from your credit report using a dispute letter. If a collector keeps a debt on your credit report longer than seven years, you can challenge the debt and request it be removed. This is especially true if you have proof of the start of the delinquency.
If you have an excellent credit history, you may be able to get the original creditor or collection agency to remove the derogatory mark as a favor or act of “goodwill”. You’ll generally have to pay the collection account off first, though, if you haven’t already done so.
If you have an otherwise blemish-free credit history, go ahead and ask the financial institution for a goodwill deletion. Removal after payment might be against their rules—but goodwill deletions might not be and it never hurts to ask. You can find goodwill letter templates online to help you communicate with your lender.
There are other options to consider for debt settlement though.
Dispute Any Inconsistencies to a Credit Bureau
The first step to closing a settled account on your credit report is to dispute it.
You must study the loan or account closely and see if there is any inaccurate information.
If there is, then you can dispute inaccurate information.
This information can include personal details like your name and address to inconsistencies in repayments.
For example, you have kept track of making payments (as you should) and when comparing your data to the records on the account it appears that they didn’t receive or track a payment.
This is something you should dispute.
To dispute, you must contact one of the three credit bureaus.
Equifax, Experian, and TransUnion allow anyone to file a dispute online or by mail.
When filing your dispute you must provide your name, number of the account you are disputing, why you’re disputing it, and supporting information and documents to prove that the dispute is valid and accurate.
After providing the credit bureau with your dispute and supporting information they must look into it.
They have a timeline of 30 days to begin the investigation process.
If the credit bureau finds anything, they will inform you in writing through the mail.
If the settled account was faulty, it will then be removed from your account.
The only way it will appear again is if the creditor proves it was accurate.
This is a great way to not have the account affect your score negatively but in most cases, it will still remain on your report.
Send a Goodwill Letter to the Lender
If you feel like going directly to a credit bureau isn’t the right attack, then you can send the lender a goodwill letter directly.
This letter is a polite way to ask if a lender will remove the settled account from your credit history.
This differs from a dispute because you are asking nicely to have the settled account removed and not stating any inaccuracies.
Sending a goodwill letter is ideal for people that defaulted on a loan due to personal injuries or illnesses.
Keep in mind that creditors will look at the history of the account and try to see if you made any attempts to get caught up after one of these circumstances.
They may use this information to make a decision on your account.
At this point, you can offer to make the full payment or try to find a middle ground.
With the lender by settling on an amount that is less than what’s owed.
After finding a way to pay in full or at least some, the lender should remove the account from your credit report.
Keep in mind the negative effects of the account will be removed since it is considered to be paid, but the ragged payment history will still be available on your account.
Wait for the Settled Account to Drop Off
Say you looked into the account and can’t find any inaccuracies.
Or you’ve sent a goodwill letter trying to find common ground but the lender won’t budge.
We hate to tell you, but if you’ve tried both of these approaches and the account won’t be removed from your account, you will have to wait it out.
7 years may seem like a long time, but it’s not forever.
In at most 7 years from the first date of your missed payment or the date you paid the account in full, it will drop from your report.
By reviewing your credit report you can see how much time is left on the settled account and from there determine how long it will still appear on your account.
If the settled account isn’t affecting your score in any way, it may just be best to wait it out instead of going back and forth with credit bureaus and the lender.
Can Settled Accounts Be Removed?
The short answer is no. Settled accounts aren’t always be removed from your credit. There are several reasons why they can’t be removed.
Paying off a settled account without a pay-to-delete letter. Using this method doesn’t put into motion the steps necessary to remove the settled account. As such, your lender has no incentive to remove the account. Legally, your lender doesn’t have to remove the account unless they’ve signed a letter saying otherwise. Or, you haven’t paid off the settled amount. In a case where you haven’t given the lender or collections agency the reduced amount you agreed to pay, they won’t take the settled account off your credit report.
How Will You Attack Your Settled Account?
You know what a settled account is and how it can affect your credit score.
If the account affects your credit score negatively and causing it to drop, it’s time to start thinking about ways to remove the account from your report.
How to remove settled accounts from credit reports may seem like a long and grueling process, but once the account has been removed you won’t be a high risk for financial institutions.
As we have stated, if the account appears to just be hanging out and not affecting your score in a positive or negative way, it’s best to just let it on your report.
To be honest, showing this payment history can help your credit score as long as you were on time.
Now it’s time to decide if you will let the settled account stay on your report or if you will take steps to remove it.
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