If you’ve successfully achieved debt settlement with your creditor, you do realize the worth of this hard earned resolution. It’s a huge financial turning point but it of course comes with a cost. It’s a combination of stress, sacrifices and rebuilding. After debt settlement, most people wonder if they should start using their credit cards again. It’s a one pressing question and there’s no one-size-fits all answer to it.
Whether you should start using your credit card or not simply depends on your financial circumstances, your spending habits, your goals and of course the reason why you got into debt in the first place. Before using your cards again, it’s important that you weigh out the pros and cons in detail and consider your financial situation to make a more informed and responsible decision.
Let’s start with the basics!
What Is Debt Settlement?
In a debt settlement, the debtor negotiates with the creditor on reducing the total amount of the debt. For this, the debtor has to pay a decided lump sum of the total debt and in exchange the creditor forgives the rest of the portion of the loan. Sounds easy? Well, it really isn’t and as said earlier, it comes with a lot of stress and sacrifices. It’s stressful because not all creditors agree to such settlement offers because they aren’t legally obliged to. If you are far behind your monthly payments and your account is delinquent then yes, maybe your creditor will choose the easy way out and accept your settlement offer. In the worst case scenario, he might take legal action against you which is why it’s important and recommended that you work with a debt settlement company.
Companies like Mountains Debt Relief can work wonders for you if you know that your creditor is a little difficult to deal with. These people use a more professional approach and as they have a lot of experience in settling debts, they’ll be better at negotiating with your lender and convincing him of a lump sum settlement. Moreover, the sacrifice part of a debt settlement is that your credit score really suffers during this process. A “Settled” account will stay on your credit report for 7 years and it’ll take you months to rebuild your score too. A poor score means less financial opportunities and that’s exactly the downside of a debt settlement.
Pros And Cons Of Using Credit Cards After A Debt Settlement
Now that you know everything about debt settlement in detail, it’s time to learn about the pros and cons of using a credit card again after a tough settlement journey.
Pros
- Credit Rebuilding Tool
After a settlement, you need to take immediate measures to improve and rebuild your credit score and this is where a credit card can work wonders for you. If you use the credit card responsibly and make all your payments on time then your credit score can increase by leaps and bounds and it’s a much better option than avoiding credit entirely.
- Emergency Financial Buffer
Emergencies are inevitable and if you don’t have any savings at your end then your credit card can come in handy in such a situation. It can work as a financial buffer that’ll help you avoid taking up any payday loans or other loans with high interest rates.
- Benefits And Rewards
If you use your credit card responsibly and manage it well, you can enjoy multiple benefits and rewards. From cash backs to travel points and even fraud protection, credit cards come with a lot of benefiting rewards that you can avail.
- It Can Serve As A Proof Of Creditworthiness
Using your credit card responsibly can serve as a proof for your lenders that yes, you are capable of managing your debt. This can improve your chances of getting loans in the future with better rates.
Cons
- You Could Fall Back Into Debt
If the reason why you ended up in debt was overspending then using your credit card again after debt settlement isn’t the best option or else you’ll fall into the same situation. It’s very easy to slide back into your old habits especially if you don’t have a budget prepared to improve your financial situation.
- Lesser Good Credit Offers
After a debt settlement you’ll only have access to high interest secured credit cards at least until you work on building your credit score. A high interest credit card means you’ll be spending more money.
- Short Term Impact On Your Credit Score
Your credit score will already be in a fragile state after a debt settlement. In such a situation, applying for new credit cards means more impact on your score and new cards will lead to hard inquiries on your credit too.
Effective Tips To Use Credit Card Wisely After A Debt Settlement
If you’ve decided to use your credit card after considering all the pros and cons then here are some useful tips that can come in handy to you;
1-Start Small
You can get a secured credit card with a small limit. After using your card, when you make your monthly payments on time, it’ll improve your credit score slowly and safely.
2-Automate Your Payments
In order to avoid any late fees or interest charges, it’s best if you automate your payments. If you ever forget to pay off your credit card’s monthly bill, the amount will automatically be deducted from your account and it’ll save you a lot of money in the long run.
3-Monitor Your Credit
It is quite important to monitor your credit especially after a debt settlement. You can use multiple online tools to keep a check on your credit report. In case you find any errors in the report, it’s important that you take immediate action and dispute it with your credit bureau to get it fixed.
4-Set A Budget And Spend Wisely
You should only use your card for necessary expenses like to pay your gas or utility bills. Don’t make any large purchases with your credit card and make a budget and track all your spendings. The only factor that decides whether or not a credit card is good for you is how you spend it.
5-Avoid Carrying Any Balance
Don’t leave any outstanding balances and pay your card’s bill in full every month. You don’t want to end up in debt again. Especially carrying a balance will increase the interest which means you’ll be paying more than what you owe every month.
Overall Verdict
It’s not inherently bad to use credit cards after debt settlement but what matters is how you use your cards. Using the card responsibly can work wonders in your favor, it can help improve your credit score and build a solid credit history. For those who misuse the card, it can open new doors to trouble. The key here is self-awareness and controlled spending.
Especially post settlement, you should learn from your past experiences and adopt healthy financial habits for a secure financial future. Even if you don’t want to rely on credit cards after settlement, you should still start making more informed financial decisions by creating a budget and sticking to it. Moreover, to avoid any new debt, you’ll have to cut down your unnecessary expenses and old habits that led you to debt in the first place. At the end of the day, it’s all about committing to the process. With consistent efforts, a realistic budget and a minimalist lifestyle, you sure can lead a financially free path.
FAQs
Q1. Can Using A Credit Card After Debt Settlement Help Build My Credit?
Yes, a credit card can help you rebuild your credit but only if you use it responsibly. All you have to do is to pay your balance in full every month and avoid making any large purchases with your card. Only use it for your necessities and you sure will see a difference in your credit.
Q2.What Type Of Credit Card Should I Get After Debt Settlement?
You should get a secured credit card after debt settlement especially if your goal is to improve and rebuild your credit. It’s always a good starting point and all you have to do is to make a security deposit which will be your credit limit. You just have to keep your credit utilization as low as you can and then pay your monthly bill on time.
Q3. Will Getting A New Credit Card Hurt My Score?
Yes, applying for a new credit card after settlement can open a hard inquiry on your credit and you’ll witness a drop in your credit score too. However, the drop is temporary and with the right usage, you can lift up your score and recover the damage of the card on your credit.