Credit score: Can you remove settled debts from your credit history?

Credit scores can be affected by outstanding debt, even if it no longer exists. Navigating debt negotiations can be tricky, especially if you settled with a company for less than you owe. But a company can and will remove a settled debt from your credit history, if you know how to ask.

Most of us have had a bad mark or two on our credit history – and yes, that includes yours truly. It also includes the following reader. See if you can relate…

Dear Mr. Johnson,

I used to have a credit score of 840. However, two years ago I lost my job, got a divorce, and finally had to stop paying my credit card bills. Eventually, they all called me. So I borrowed money and settled with them all.

As a result, my credit score was impacted. Most of them put on my credit report that it was settled and not paid in full. Can I write a letter to the banks asking them to remove it? And is this something that is normally done after the fact?

I appreciate your help and thank you very much.

- Peter

Peter’s question is all about choices. He found it difficult to pay his bills and chose instead to settle them by offering to pay less than he borrowed. His lenders chose to accept lesser payments, but it was also their prerogative to put notations in his credit file that damaged his credit history.

He wants to know if he can change the banks’ prior prerogatives by writing letters asking them to remove negative credit history entries arising from his settled debts.

The short answer is yes, you can write a letter, Peter. But it almost certainly won’t work. For future prerogatives, let me explain the proper procedure for doing something like this by relating a personal experience…

About 15 years ago I had a disputed cell phone bill involving an early termination fee. I won’t bore you with the details, but essentially, I felt I shouldn’t have to pay their $200 contract termination fee. After several rounds of heated telephone negotiations, the cell company stopped bothering me, and I smugly assumed they’d either seen things my way, or given up.

Fast forward a few years.

I’m applying for a mortgage. Lo and behold, what pops up but an outstanding unpaid bill to my previous cell phone company! Who knew?

I should have known. Applying for any kind of loan without first examining your credit history is a bonehead move. Since I’ve always paid my bills on time, I assumed my credit would be flawless and an advance copy of my credit report would have been a waste of money. (They cost back then – this was before the days of free report.

I’d long since forgotten about my prerogative to ignore my throw-down with the cell company and the unresolved $200 termination fee.

What did I do? What Peter (remember him?) should have done. I called the cell company and told them I’d give them $100 to settle the account, provided they agreed in writing to completely remove the entry on my credit history. They agreed to do so, and sent me a signed letter to that effect. Only after I’d received it did I send them their money.

So if you ever consider settling a debt, or know someone who might, here’s what you need to know…

• If you settle a debt for less than you owe, the company accepting that lesser amount isn’t going to be happy about it. (Would you be?)
• After the debt is paid, the unhappy company will no longer hound you, but they’ll hurt you. They’ll add a notation to your credit history that the debt wasn’t paid in full, damaging your credit. The pain will last for seven years, although it will be less damaging as it ages.
• You have leverage until you send the lender a check, but once you’ve done that, the company has no incentive to help you. That’s why…
• You should never settle a debt without first obtaining a written guarantee from the lender to remove all negative information pertaining to the debt from your credit history. This written guarantee must be received before you send a dime.
• When dealing with anyone trying to collect a debt, verbal assurances may as well be in Chinese. If it’s not in writing, it never happened. Period, no exceptions.

If a lender tells you they won’t remove the negative information, fine. That’s their prerogative. But if they tell you they can’t, that’s hogwash. A company that can insert negative information can remove it.

Bottom line? Debt negotiations can be tricky, and the company you’re negotiating with is probably going to be better at it than you. If the amounts are large, you might want to get a consumer attorney or other expert in your corner. Or at least read a lot about it – there’s plenty of free information on this site and others.

But hey, it’s your prerogative.

Stacy Johnson is the editor and founder of Money Talks News, a consumer/personal finance TV news feature that airs in about 80 cities as well as around the Web. This column first appeared in Money Talks News.