Settled Debt

[Anonymous]

We recently decided to buy a home and have had a goal to be house hunting by April of this year. We're terrible procrastinators and didn't realize we could not get a loan with a certain debt on our credit, so we JUST (today) settled a debt that was reported in March.

I have a letter stating it will be "considered settlement in full," but when I asked how it would be reported the collector said it would be considered "paid in full" and "satisfied."

Our scores are already low (589, 601, ???). Will this potentially have a negative impact on an already unattractive score? What other actions should we take to improve? Is a goal date of April unrealistic?

My husband has a comfortable income, extremely reliable work history, and we also have small secured/unsecured cards with low limits.

I appreciate any tips or information!

[Adkins]

Have you asked a mortage loan officer about it? Some can do SPs on your credit and tell you what needs to be improved. As a general rule, you don't want add any new credit approximately six months before applying for a mortgage. 

I recommend you find ABCD2199s Guide to Rebuilding Credit thread, here in the forum. 

[RobertEG]

As for the impact of the settled debt, several factors will come into play.

First, if the debt was already reporting as delinquent, then the required update due to paying the debt will also effectivel report that the overall delinquency on the debt has extended up to the new status of paid, which can negatively impact your payment history scoring of the delinquent account if it has been some time since they previously updated their reporting.  

However, if they made prior reporting within the last couple of months, it is already being scored as being delinquent for a period close to this month, and the update may have little impact.

Were they already making recent updates, or has it been a long time?

Second, is it a revolving account?  If so, update of debt balance to $0 may reduce your % util of revolving.

Third, the terms "settled in full" and "satisfied" can be a bit ambiguous as they regard credit reporting.

If they settle under agreement that the debt is discharged, then the debt is legally considered to have been paid in full amount, and they must update the currrent status to paid, and the current balance under collection to $0.

However, they can still report the additional special comment that the accepted payment, while in full discharge/satisfction of the debt, was nonetheless at an amount less than the amount of the full indebetness.  A special comment of paid, but for less than the full amount of the debt, notifies others that you have a history of not paying your full debts, and can be viewed negatively upon a manual review.

It is not a scoring issue per se, but can nonetheless be a factor in future applications for credit.