Settlement vs. Charge-Off

Even though debt settlements and charge-offs can lighten your load of having to pay back a debt, they can have a negative impact on your credit score.

When it comes to credit card debt, one of the last things you want is a settlement or charge-off on your record, as it will show as a negative item on your credit report. Either one means that you’ve been seriously delinquent in paying your debts. While you can take some steps to minimize the damage, both settlements and charge-off accounts will affect your credit score.

What Is a Settlement or Charge-Off?

When you settle a debt, it means you don’t pay back the full amount you owe. A creditor will usually only accept a settlement if it appears that you can’t afford to pay back the total debt. This generally occurs when you have missed at least a few payments and if it appears that you don’t have the ability to pay off your debt. Rather than end up with nothing, a creditor may agree to a settlement. A charge-off means that a creditor has given up entirely on getting paid back and has recorded your debt as a loss. Typically, this occurs after about six months of non-payment but varies from lender to lender and can be as early as 90 days.

How Do Settlements and Charge-Offs Impact my Credit Report?

Both settlements and charge-offs are bad for your credit report. In both cases, the delinquent account stays on your credit report for seven years, even if you ultimately pay off the accounts in full. The reason for this is that your past behavior is considered a predictor of your future behavior. If you get an account charged off and later settle it for less than you owe, both notations will show on your credit report.

What Is the Consequence of Negotiating a Settlement or Charge-Off?

The negative impact on your credit score due to settlements and charge-offs begins will eventually lessen. However, any creditor that looks at your credit report will still see these notations for the full seven years. Any time you apply for a car loan, a home mortgage, or a new credit card, your creditor is likely to take your past actions into account. Depending on the creditor, this could result in a denied application. If you manage to get a loan, you may have to pay a higher interest rate to compensate the creditor for the extra risk involved in granting you credit.

Which Is the Lesser of Two Evils?

Both settlements and charge-offs reflect credit delinquencies. If you’re in the unfortunate position of facing a settlement or charge-off, consider which course of action will harm you the least. While negotiating a debt settlement of pennies-on-the-dollar can help you in the near-term, you may face long-term consequences from having an account listed as settled for less than the amount owed.

If you pay that account off, at least your credit report will show that you paid in good faith when you were able to do so. Letting an account drift to a charge-off could lead to lawsuits and judgments against you, which in turn could ultimately lead to bankruptcy.

About the Author
John Csiszar began writing in 1989 and his work appears in various online publications, including The Huffington Post. Csiszar earned a B.A. in English from UCLA and served 18 years as an investment adviser and certified financial planner.