A settled debt is better than an unpaid, past-due one on your credit report, but settling a debt can often hurt your credit score. That’s because settling a debt means you didn’t pay it as agreed. Here’s how to rebuild credit after debt settlement.
How badly your credit has been hurt depends on factors like how behind you were on paying your bills and the age and number of the accounts you’ve settled. That’s especially true if you stopped making payments to your creditors to save up a lump sum settlement, which is something debt settlement companies will often ask you to do.
The amount of time it takes for your credit to start improving will largely depend on your credit history. If the past-due debts you settled were somewhat unusual for you and you otherwise have a history of successfully paying your debt, that will help your credit score rebound. The same is true if you still have open credit accounts, a mortgage or other loans that you are making timely payments toward. If you have a thinner credit history, it could take longer for your credit to recover, says Michael Bovee who’s been working in debt settlement for 20 years and is the co-founder of Resolve.
Settled debt stays on your credit report for up to seven years from the time the account went delinquent (the date you missed your first payment). The older the debt gets, the less negative impact it will have, especially if you’ve started adding positive credit history back to your report.
As you start settling your debts, there are five steps you can take to rebuild credit:
1. Monitor your credit report.
As you begin to settle your debts, keep an eye on your credit report. Check your report about 30 days after a debt should have been settled to make sure the account status has been updated, Bovee says. If your accounts aren’t being updated in a timely manner, or at all, contact the credit bureaus and get in touch with your debt settlement company if you’re using one. It’s important not to just assume that your credit report is being accurately updated.
2. Apply for new credit.
“If you have a mortgage, a car loan, a credit account in good standing, you’re ahead of the game,” Bovee says about rebuilding your credit after debt settlement. But if after settling your debt, your left with few or no open accounts, you’ll want to get some new credit. Store cards or gas cards are usually easier to get if you find you have a hard time being approved for a traditional credit card. You can also look at getting a secured credit card. These cards require you to put down a deposit that frequently serves as your card credit limit. Secured credit cards can sometimes have high interest rates and fees, but they are a way to start building back positive credit payment history.
3. Become an authorized user.
If you know someone with a solid credit history who would be willing to add you as an authorized user to one of their longer-established cards, that’s a fast and easy way to inherit positive credit history, Bovee says. Keep in mind that both your actions and those of the main account holder will influence each other’s credit history.
4. Pay your bills on time and in full.
The biggest factor, 35% in fact, for what determines your credit score is how you pay your bills. Paying your bills on time, and especially in full, will not only potentially help stop you from getting in credit debt trouble again, but also will keep your credit balances low, which accounts for 30% of your score.
5. Get a small loan.
Having a mix of types of credit is good for your credit score. If you have an existing car loan or mortgage, stay on top of your payments. If you don’t, you might think about taking out a small loan. But only if you can afford to pay it back, of course. A small installment loan is a good option, Bovee says. Credit unions in particular are often more willing to give out loans to people with less favorable credit.
Debt settlement is not something to be entered into lightly, but for people who want to avoid bankruptcy and can afford to pay back some of their debts, it can be a valid option (learn more about your debt options here). Once you’ve settled your debts, the best way to rebuild your credit is to open a couple of new credit accounts and then use them responsibly.
How Resolve can help
If you’re dealing with debt and not sure what to do, we’re here to help. Become a Resolve member and we’ll contact your creditors to get you the best offers for your financial situation. Our debt experts will answer your questions and guide you along the way. And our platform offers powerful budgeting tools, credit score insights and more. Join today.