As per a US survey, 34.4% of enrollees got more than 75% of their debt settled within just three years. In a financial crisis, people often look for ways to get rid of their debts because it just gets really difficult to make the monthly repayments when you are already short on money. Moreover, all your late payments or missed payments are constantly being reported to your credit bureau and it just keeps lowering your credit score.
In such situations, a debt management plan, debt consolidation or debt settlement programs can really come in handy. These are some great debt relief options for people who simply can’t afford to pay their debts back. The catch here is that no matter what you opt for, you’ll still have to pay to clear your debt and if for example, you opt for debt settlement, it will affect your credit score. The negative impact on the credit report can really become a cause of concern for people. Fortunately, there are multiple ways you can rebuild your credit history and start from scratch.
Why Does Debt Settlement Hurt Your Credit Score?
In order to improve your credit score, you first need to understand why and how a debt settlement program can reduce your credit score.
A debt settlement means that you negotiate for a lower settlement with your creditor where you pay the partial debt and the rest of it is forgiven. On the other hand, a high credit score is more like a reward for people who have been maintaining their accounts with timely payments as per their original credit agreements. A “settled” debt basically negates that agreement and involuntary closure of account modifies the original contract which is why your score gets dinged.
What Happens When You Have a Low Credit Score?
Your credit score is like a benchmark that helps you get loans, jobs and even houses. With a low score and a poor credit history, you will face a lot of difficulties especially when taking up a new loan. Lenders use your credit score to determine their risk factor when giving you a loan. A low score means less creditworthiness and this just puts the lender in doubt whether he should take the risk or not. Even if you manage to get a loan with a low score, it will come with a high APR, a higher interest rate and a restricted credit limit.
Some other difficulties you’ll face are;
- Impact On Housing
Your landlord will probably do a credit check and if the score is low, he’ll be hesitant on accepting your rental application.
- Issues With Utility Deposits
A utility company will require a security deposit or a guarantee letter from someone who will be responsible to pay on your behalf when you can’t.
- It Will Affect Your Employment
In some cases, if your credit score is too low, you might find it hard to get a job. Most companies do a credit check before hiring. It will be more troublesome for you if you are looking for a job in the legal or financial field.
How To Repair Your Credit After A Debt Settlement?
The damage that comes from a debt settlement is temporary and with the right measures, you can recover your credit score within a year.
Here are a few tips that will come in handy to you;
1-Using A Credit Builder Loan
You can take up a credit builder loan in order to repair your credit history. What happens here is that your loan funds are deposited into a savings account for the duration of the term. You then have to make affordable monthly payments and the loan company will report your loan activity to your credit bureau. Timely payments will be marked on the report and it will eventually increase your score. When the loan amount is “paid in full”, the funds in the savings account are then released and the borrower can use them.
2-Making Timely Payments
Timely payments make up around 35% of your total FICO score so you clearly can’t miss out on this one. Whether it’s a debt, a utility bill or some other payment, you need to ensure that you are paying the amount before the deadline without any delays. In simpler words, you have to be organized with your monthly installments as this can really work wonders for your credit history.
3-Keep Checking Your Credit Reports Every Now And Then
You can easily get a free copy of your credit report from multiple online platforms. It’s of utmost importance that you track your report and ensure that there aren’t any errors or inaccuracies in it, affecting your score. If you find any error adversely affecting your score then you need to start a dispute and get it removed as soon as possible.
4-Keep A Low Credit Utilization Ratio
Credit Utilization Ratio = Total Current Debt / Total Available Credit
You need to keep this ratio below 30% to achieve optimum results. Lenders often look at this ratio to determine whether you are facing any financial difficulty and if they see your balance approaching your credit limit then they might think twice before giving you a loan.
5- Diversifying Your Credits
Your credit mix makes up 10% of your FICO score. A credit mix means you are managing two or more types of credit cards. You just need to apply for new credit cards over time. Moreover, you don’t need to rush the process because a credit mix won’t influence your score a lot but yes, with time it will have an impact. It will take you months and sometimes years to diversify your credits.
Overall Verdict
If you are facing debt related challenges and your financial situation is not so good at the same time then using the debt settlement strategy will definitely be worthwhile. If you are new to it all then hiring a debt settlement company would be an even better move because with professional expertise, you can expect a smooth and efficient settlement journey. On the other hand, as far as your credit report is concerned, well, don’t worry about the temporary dip because with the right measure and consistent efforts you can easily build the report back.
For credit repair, one of the most important things is to prove that you are trying to become financially responsible with your actions. One missed or late payment can send all your efforts down the drain so these are some factors that you need to take seriously. If you are seeking help to repair your credit then there are professional financial counselors out there that can make things easier for you. They can make a budget for you, review your financial situation and help you make better and more informed financial decisions that will reflect on your credit report.
FAQs
Q1. How Long Will Debt Settlement Stay On Your Credit Report?
Almost all of the negative credit entries reported to the credit bureau stay on your report for a long time. For example, bankruptcy will stay on your report for up to 10 years and when it comes to debt settlement, it will stick to your report for 7 years. However, the impact of such entries will diminish with time and with the right measures, you can rebuild your history.
Q2.How Long Will It Take For My Credit Score To Improve?
With the right account management tactics, timely payments and a financially responsible behaviour, you can bring your credit numbers back to normal within just 12 to 24 months after your debt settlement.
Q3. Are Credit Builder Cards A Good Idea?
Credit builder cards are a great option for those who want to build a solid credit history or for someone who just hit a bumpy road like debt settlement. It’s just that these loans come with an eligibility criteria and they have lower credit limits with higher interest rates. If you manage to pay your monthly installments with a credit builder loan on time then this definitely will increase your credit score.
Q4.Are There Any Do’s And Don’ts For Credit Improvement After Settlement?
Do’s: Make timely payments, consider secured credit cards, and communicate with your lenders. Don’ts: don’t forget to get a No Objection Certificate (NOC) after closing the account, don’t accept the first settlement offer and negotiate as much as you can.
Q5. How To Establish Credit For The First Time?
Building credit from scratch is very easy. You just need to ask your loved ones to add you as an authorized user on their credit card, apply for a starter credit card or just get a credit builder account.
Need professional assistance to deal with debt settlement and its impact on your credit report? Try Mountains Debt Relief to experience utmost customer satisfaction.