If the collection agency takes the steps to update the consumer’s credit reports then the account balance should be changed to zero. Along with the zero balance, a notation along the lines of “settled for less than full balance” will be added to the consumer’s credit report.
Myth #3: Settling derogatory accounts improves credit scores
Truth — The settlement of a derogatory account will most likely do nothing to improve a consumer’s credit scores.
The reason settling a derogatory account almost never has a positive impact on a consumer’s credit scores is because current FICO and VantageScore credit scoring models are built to predict the likelihood of whether a consumer will miss payments in the future.
If a consumer has missed payments in the past, illustrated by the fact that there are settling debts, then the odds are higher that he will miss payments again in the future.
Settling or paying off the balance of an account does not erase the fact that the default occurred and, therefore, usually does nothing to raise a consumer’s credit scores.
There is one exception to this rule. The most current version of VantageScore, called VantageScore 3.0, and the recently announced FICO 9 credit score will ignore all collection accounts that have a zero balance, regardless of whether it was paid or settled. There are some scenarios under those two scoring platforms where the consumer’s scores could go up.
Myth #4: Debt settlement resets 7-year clock
Truth — Nothing can legally cause a derogatory account to remain upon a consumer’s credit reports for longer than seven years from the date of default on the original account, NOTHING.
According to the FCRA, derogatory accounts have a capped time limit for how long they are allowed to stay on a consumer’s credit reports, called a statute of limitations. This is great news for consumers because it means they cannot be penalized for their past financial management mistakes indefinitely.