It is an undeniable fact that a significant number of people out there are just drowning in credit card debt and it’s really taking a toll on their mental health especially during such tough economic times. To tackle such an overwhelming situation, there are multiple debt relief companies out there that can help people get out of debt but it always comes with a cost.
In a debt settlement negotiation, you clear your outstanding debts by negotiating a smaller amount than what you originally owe to your creditor. As easy and simple as it sounds, it’s really not and what will it cost you? Your credit score! Let’s learn how debt settlement and credit score linked and what to do about it!
How Debt Settlement Impacts Your Credit Score?
People often opt for debt settlement out of all the other debt relief options when the only alternative left is bankruptcy. In simpler words, debt settlement is mostly like a last resort for people who have a huge pile of debt to deal with but they don’t want to take extreme measures like declaring bankruptcy.
Want to know does debt settlement hurt credit? Well even though debt settlement reduces your debt obligations, it will have a negative impact on your credit score. It makes sense because high credit scores are specifically designed to serve as a reward to people who have been managing their finances and bills responsibly. For example, if you’ve always been punctual with your bill payments, your credit utilization ratio is low and if you don’t have much debt to deal with, your credit score will bloom. Ultimately, you’ll be open to multiple opportunities like better interest rates, better jobs and better housing and rental arrangements.
On the other hand, late or missed payments, unpaid pills and outstanding debts, all of this can lead to a poor credit score. Especially in a debt settlement negotiation, you are basically paying only a portion of your debt instead of the full amount and this settlement negates the original credit agreement. Ultimately, it affects your credit score and such an involuntary closure of the account will stay as a black mark on your credit report. Despite it all, debt settlement is still worth it especially if you want to step on the path towards a sounder and more stable financial future.
What Happens To Settled Accounts On Your Credit Report?
Due to any financial hardship, if you aren’t able to pay back the full amount of your debt, it’s always best to try and negotiate on a lower settlement with your creditor. If you and your creditor reach an agreement where you pay a lump sum portion of the debt and the rest is forgiven then your account will be marked as “settled” on your credit report.
Here’s how it can impact your credit report;
Status Of Your Account: Your account will show “Settled for less” or “Settled” which is indication that your debt wasn’t paid in full.
Impact On Your Credit Score: A settled account will impact your credit score negatively but it’s still not as harmful as an “unpaid” open debt account. Your credit score will reduce in a debt settlement because you aren’t paying the outstanding balance in full. The exact impact depends on multiple factors like the amount of debt you owe, how recent your settlement is and what your previous credit history was.
Long Term Effect: A “Settled” account can stay on your credit report for up to 7 years starting from the day when you first missed your payment. With the passage of time, this impact will diminish and your score will improve if you start demonstrating positive and responsible credit behavior.
Future Lenders: Your future lenders can see that your account has been settled and that you’ve been facing some financial distress in paying off the debt. Lenders might be a little hesitant in giving you a loan in the future but it still is better than having an unresolved debt in collections.
How Long Does Debt Settlement Stay On Your Credit Report?
As said earlier, a debt settlement will stay on your credit report for at least 7 years. Your 7 years start from the first day of the original delinquency (the day you missed your payment). To reduce this time, debt relief companies often advise people to stop making any payments to the creditor at least 6 to 7 months before negotiating a debt settlement.
Here’s how it all works;
- Original Delinquency Date: Your 7 year clock starts right from the first day your payment was marked as “overdue”. This can sometimes result in your account being placed into collections.
- Over Time Impact: Even though a “Settled” account will stay on your report for 7 years, its impact on your credit score will diminish with time. Especially if you start making your payments on time, avoid any more debt and show responsible financial behavior then you can expect your credit score to improve.
- Early Removal: In some cases, you can get your debt settlement mark removed off your credit report early by negotiating with your creditor or disputing any errors. However, the 7 year period is usually the standard time that it would take you to get rid of this black mark.
How To Rebuild Credit After Debt Settlement?
What makes debt settlement worth the risk is that it does not come with any permanent damage to your credit report or score. Your score does take a hit initially but it’s all temporary and you can always take measures to improve and rebuild your credit without any hassle. Here are a few effective steps if you want to know how to fix credit after debt settlement.
1-Pay Your Bills On Time
One of the best things you can do to improve your credit score is to make timely payments. Whether it’s a monthly bill, utilities or credit card payments, make sure to never miss a deadline. It’s best to automate your payment systems because when you do that, it will show your reliability and with on time payments, your credit score will increase.
2-Check Your Credit Report For Any Errors
It’s of utmost importance to keep reviewing your credit report every now and then. If you find any inaccuracies or errors, you should dispute them immediately and get them fixed. Sometimes, errors or inaccurate information are pulling down your credit score.
3-Use A Secured Credit Card
Using a secured card to rebuild your credit is one of the best and the most useful moves. All you have to do is to pay your payment in full each month to avoid any interest and use the card responsibly. Secured cards report to credit bureaus which can work wonders in your favour if you know how to make the most out of it.
4-Diversifying Your Credit Mix
Another great tactic is to diversify your credit mix for example, apply for credit cards and installment loans etc. Just make sure not to open too many accounts all at once or else your credit score will suffer more. Just open the number of accounts you can easily manage.
5-Avoid Any New Debt
To improve your credit, you need to ensure that you are avoiding all the factors that can further lower your credit score. For example, it’s best to avoid applying for any new loans in the beginning. Let some time pass by and once you see the improvement in your credit, you can then take another loan (only if required).
6-Getting A Credit Builder Loan
A credit builder loan is specifically designed to increase your credit score and improve your report overall. What happens here is that the lender instead of giving you the loan, holds it into a savings account until all your debt is paid off. Once the payments are completed, the lender will release your funds and all the timely payments will be reported to the credit bureau.
Best Credit Cards For Rebuilding Credit
A credit score is a simple three digit number but it comes with a huge impact on your financial health and your overall life too. A poor credit score means you’ll have to face multiple financial restrictions and it will definitely affect the quality of your life.
If debt settlement has taken a dig at your credit score recently and now your goal is to just do all you can to improve your credit then this is just the right place for you. Getting a secured card after a debt settlement should be on your priority because it can work wonders for your credit report and score. Here’s a list of some of the best and the most popular secured cards right now that can help in rebuilding credit;
1-Discover It Secured Credit Card
The Discover It Secured Credit Card is a solid option for those looking for a reliable card that not only helps in improving the credit score but also offers some great rewards, bonuses and cash backs. The best part about this card is that it requires no credit history at all. So if you are someone with a poor credit score or no credit history at all, it doesn’t matter and you can easily get this card.
You just need a refundable security deposit of $200 which is quite affordable and reasonable. Moreover, you don’t have to worry about paying any annual fee which is another plus that will save you money. With it, you can increase your score by 30 points by simply using the card responsibly and making your payments on time.
2-Bank of America Customized Cash Rewards Secured Credit Card
Due to lower credit limits, people often face restricted reward potential. However, with the Bank Of America card, you can earn 3% cash reward on your own category of choice. As far as the security deposit is concerned, you need a minimum of $200 to get started with this card. The best part is that you can increase your security deposit to $500 too which ultimately means more room for your credit limit to grow.
As a cardholder, you’ll have access to your FICO score and another plus about this secured card is that after reviewing your credit history and your current account, you may be upgraded to an unsecured card after a certain time. There’s absolutely no annual fee that you have to worry about too!
3- Capital One Quicksilver Secured Cash Rewards Credit Card
If you have a less than stellar credit then applying for the Capital One Quicksilver Secured card will be the best decision you’ll ever make. It’s a popular card especially among those who want to travel abroad because you don’t have to worry about any fee for foreign transactions with it. Moreover, the card comes with a very lucrative and simple rewards structure and the minimum deposit you need is just $200.
With good payment behavior, you can be upgraded to an unsecured card in just 6 months. Moreover, if you maintain and manage the card well, your credit score will improve by leaps and bounds because this one reports to all three credit bureaus. There’s no hidden or additional fees that you have to worry about, once you make the $200 deposit, you are all good to go.
4-OpenSky Secured Visa Credit Card
If you’ve rejected a secured card due to your past credit history then try OpenSky secured visa card and you sure won’t disappointed with this one. The card requires no credit check at all which makes it a great option for someone with a less than stellar credit score or no score at all. Again, just like all other reputable secured cards, you just need a security deposit of $200 to start using the card and with additional deposit, you can increase your credit limit.
Another huge plus here is that OpenSky card reports to all three credit bureaus which will make your whole credit rebuilding journey a lot easier. Moreover, there’s no annual fee or hidden charges that you have to worry about with this card. It’s an easy secured card for people struggling with poor credit histories.
5- AvantCard
Lastly, we have AvantCard as one of the best secured credit card options for people looking to rebuild their credit. With it, you get 1% unlimited cash back on every purchase you make and there’s no limit to the monthly rewards you get. For foreign transactions, this card can really come in handy because it charges no fee for it. The application process is even easier and quicker. You just need to make your deposit and you’ll get your card within a day or two.
They have an online portal that’s available 24/7 and you can easily make your payments through it without any hassle. As it reports to all major three credit bureaus, you can expect your credit report to improve and your score to grow with responsible use of this card.
Steps To Improve Your Credit Score Quickly
With the right measures and responsible behavior, you can easily reverse the negative impact of debt settlement on your credit score. Here are some useful tips that can help you elevate your score in a short time;
1-Ask For Higher Credit Limits
You have to do all you can to increase your credit limits. When your credit limit increases and your balance remains the same, it will lead to a low credit utilization ratio and that’s exactly what you need to quickly improve your credit score. Just make sure that a higher limit doesn’t mean additional expenses. If the increase in your credit limit seems like a temptation to you then this might not be the best option. You have to avoid any extra expenses and manage the balance responsibly no matter how high your credit limit is.
2-Become An Authorized User
If any one of your relatives or someone you know has a credit card with a good credit limit and a history of timely payments then it’s best to become an authorized user on that account. It’s not necessary for the other person to give you the account details or the card. You don’t have to use the card to improve your credit score. It’s just that when you become an authorized user on such a well-managed credit card and if the card reports to all three credit bureaus, it can work wonders for your credit report.
3-Deal With Collection Accounts
An account in collections can become a serious negative mark on your credit report. If you have such accounts, it’s important to deal with them immediately and pay them off or else it will keep pulling down on your credit score. Paying off such accounts will remove the threat for you that you will used over unpaid debt.
Final Word
Rebuilding credit after a debt settlement is a time taking process so it’s unreasonable to expect overnight results. No matter what measures you take and how committed you are to the process, it will take you months and sometimes years to see any improvements in your credit report. What’s important is that you show patience towards the process and stay committed to your goal no matter how slow the improvement is. Any step you take to improve your credit is better than not doing anything at all about your report.
FAQs
Q1. What Increases Credit Score Fastest?
Timely payments can help you improve your credit score in the fastest possible way. Any missed or delayed payment can further bring down your score so it’s best to avoid such a mistake especially when you want to rebuild a strong credit report from scratch.
Q2. Does Paying Twice A Month Increase Credit Score?
The one important factor that makes up your credit score is your credit utilization ratio. You just need to ensure that it’s as less as possible. Other than that, paying twice a month won’t make any much difference to your credit score.
Q3. Is It Good To Use A Credit Card And Then Pay Immediately?
Yes, in some cases, paying your credit card bill early can reduce your overall credit utilization and when this happens, your score increases. It basically reduces your outstanding balance while your credit limit remains the same so it’s a good idea to pay your credit card bill early if you can.
Looking for effective and guaranteed ways to improve your credit? Try Mountains Debt Relief for the best and the easiest solutions that’ll lead to a sounder financial future.