In a debt settlement negotiation, you sure do get to reduce your debt but the catch here is that it will have a negative impact on your credit score. Moreover, the notion of “settled” can stay on your report for 7 years which is something people often worry about when entering into a settlement. Well, fortunately, the consequences of a debt settlement don’t last forever and they are short-lived especially if you start rebuilding your credit right away.
One of the most important things before and after a debt settlement is to keep a check on your credit score. A poor credit score can wreak havoc on your financial life which is why you need to ensure that there aren’t inaccuracies or discrepancies in your report, pulling down your credit score. If your score is low for genuine reasons like late payments and debt settlement then of course, you need to take measures to improve it.
Why Is It Crucial To Monitor Your Credit During Debt Settlement?
Settling debt means that you agree to pay a portion of what you owe to your creditor while the rest of it is forgiven. Now this really does seem like a great option that reduces your financial stress, it can lower your credit score. Here are some reasons that explain why credit monitoring is important;
1-It’ll Help You See Where You Stand Before Getting Started
Your credit score can have a huge impact on your settlement negotiations. For example, if you already have a low credit score, it can work in your favor and your creditor might accept your offer to avoid any further negative impact of the remaining outstanding balance.
2-Track How The Settlement Is Reported
While working on a debt settlement negotiation, you need to talk about everything with your creditor in detail including the fact that how the settlement will be reported. A “Settled” debt will always have a negative impact on your report but if you talk it out with your creditor and request him to report it as paid in full” chances are that it’ll cause way less damage to your credit score.
3-Dispute Any Inaccuracies
Another important reason to monitor your credit score is to find any misinformation or inaccuracies in your report. As debt settlement will already cause damage to your score, you don’t want other inaccurate factors pulling down on your score. If you feel like there are errors in your report, you should start a dispute immediately and get them all fixed.
4-Plan Your Credit Rebuilding Strategy Accordingly
When you know the status of your credit score, you can plan different rebuilding strategies accordingly. After a debt settlement, your goal should be to improve your credit score and it’s only possible when you know where you stand in the first place.
What To Check Before Debt Settlement?
1-Check All Three Credit Reports
The very first thing you need to do is to check three of the main credit bureaus including Experian, TransUnion and Equifax. Your score can vary a little so it’s important that you check three of the bureaus. If you want to get a free report, try AnnualCreditReport.com. Here, you can easily get one free report every year from each one of the credit bureaus. Other than that, you can check multiple other online platforms that provide weekly credit reports.
2-Review Your Credit Score
The next step is to review your credit score and for that you can head to credit card providers (some are offering free VantageScores and FICO scores nowadays). If not that then go directly to myFICO.com and there you can check your credit score anytime but with a small fee.
3-Identify Any Red Flags
Check if there are any debts that have been settled. Moreover, you need to check if there are any late payments mentioned or a wrong high credit utilization or if there are any accounts in charge-offs or collections.
Monitoring The Impact After Debt Settlement
1-Wait For At Least 30 To 60 Days
After debt settlement, you should wait for at least 30 to 60 days because it can take a few weeks for the change to show up on your report. Your credit will report your debt as;
- Settled
- Paid Settled
- Paid Less Than Full Balance
2-Review Your Report Again
Head to the official website of AnnualCreditReport.com or use any other tool to monitor your credit report. It’s important to verify whether your creditor has reported your debt accurately or not.
3-Monitoring Your Credit Score
You’ll see that your score has dropped initially and that’s completely normal when your debt is marked as “Settled”. With the passage of time, when your debt decreases and you start making your payments on time, you’ll see your credit score improving.
4-Dispute Any Inaccuracies
If your account hasn’t updated accurately, it’s important that you immediately file a dispute with your credit bureaus. The sooner they fix the error, the better it’ll be for your credit score.
How To Recover Your Credit Score After A Debt Settlement?
If debt settlement has dinged your credit score, don’t worry and start working on rebuilding the score immediately. Rebuilding means that you just have to focus on building a solid payment history and you have to keep your credit utilization ratio as low as possible. When you fulfil both these requirements, you’ll see your score improving by leaps and bounds and eventually the negative impact of your settlement will vanish over time.
Here’s a detailed breakdown of all the things you can do to improve your credit score;
1-Establishing A Strong And Solid Payment History
It should be your top priority to make your payments on time. From credit card loans to utility bills, just don’t delay any of your payments or else it’ll affect your credit score. To ensure that you never miss any payment, you can set up automatic payments.
2-Reducing Your Credit Utilization
Another important factor to focus on is your credit utilization ratio. You need to make sure that your total credit card balance is below 30% of your entire credit limit. In a nutshell, to improve your credit utilization, just use as less credit as possible and pay it all off before the due date. This will have a positive impact on your credit score.
3-Become An Authorized User
If anyone in your circle (friends or family) have a fair credit score and if they pay their bills etc on time then try and become an authorized user on their card. You don’t specifically have to use their card to gain the advantage, in fact, just becoming an authorized user in papers will be enough to do the trick for you. The more responsibly they spend their cards and the more solid their payment history becomes, the more it’ll reflect on your credit score.
4-Get A Secured Credit Card
A secured credit card can work wonders for someone trying to rebuild his credit. To obtain a secured card, you need to submit a collateral first. Whatever amount you deposit as security, becomes your credit limit. All you have to do is to ensure that you are paying off your secured credit card right on time, every month. Also, keep the credit utilization low so that it can have a positive impact on your credit report.
The Final Word
Debt settlement clearly isn’t an easy decision and people usually use it when it’s their last resort. The major downside of debt settlement is all the damage it does to your credit report and score. However, as the damage is temporary, you can easily take measures and improve your report by showing responsible financial behavior. It’s just that before and after debt settlement, you need to keep monitoring your credit score to ensure that it’s improving with your efforts.
FAQs
Q1. Is It True That After 7 Years Your Credit Is Considered Clear?
Most of the time, negative information like a debt settlement will stay on your credit for 7 years. After 7 years, your credit clear and you won’t have to worry about the “Settled” mark any more.
Q2. How Long Will It Take To Recover My Credit Score After Paying Off My Debt?
After you pay off your revolving debt, it will take you around 30 to 60 days to improve your credit score. Timely payments and a low credit utilization are the two keys that’ll help you increase your score.
Q3. Can I Reset My Credit Score?
No credit repair company can reset your score or start a new score file. It’s not legal. You can only make changes to your credit score by reporting any errors or inaccuracies on your report to your credit bureaus.
Looking for a reliable debt settlement company that can guide you through the process with complete transparency? Try Mountains Debt Relief for the most professional services ever.