Rebuild credit after debt settlement

How long does it take to rebuild credit after debt settlement?

If you’re thinking about settling your debt, or in the process of doing so, you’re probably looking forward to having that financial weight taken off your shoulders. You might also hope that your credit score will rebound quickly once you settle your debts. Debt settlement, though, won’t improve your credit score right away, and in fact, will likely cause your credit score to drop. Here’s what you can do to rebuild credit after debt settlement.

Related Article: How to settle debt and remove it from your credit report

There’s a good chance your credit score is already low from missing months worth of debt payments. And the good news is, that once your debts are settled, much of rebuilding your credit will rest in your hands. Using credit responsibly, especially paying your bills on time, will help you rebuild your credit history. Still, you should go in knowing that it will take some time.

How debt settlement affects your credit score

The reason debt settlement is considered a negative mark on your credit report is because settled debts are those that you’ve paid off for less than what you owed. Which means you didn’t pay the debt in full or as agreed. In most cases, it is still better to settle a debt than to continue to miss payments, but it will still ding your score.

If possible, it’s best to settle your debts before they are charged off. A charge-off is when a lender “writes off” a debt after 180 days of not receiving a minimum payment from you on the debt. However, you still owe the debt and it will still appear on your credit report. This is also the point where a lender might sell the debt to a third party debt collector.

When a lender writes off your debt, they close your account and list it as a charge off, which hurts your credit score. For many people, though, it can be tough to both negotiate and come up with the money to settle several debts within a six-month time frame. So you might want to settle one card and target one that you can take care of before a charge off happens.

The debt settlement process will especially hurt your credit score if you’ve stopped paying your creditors to save up money to settle your debts. That’s often what a debt settlement company will ask you to do if they’re negotiating on your behalf.

How long will it take to rebuild your credit

Settled debts stay on your credit report for seven years from the date the accounts were settled, or the date from when the accounts first became delinquent (you missed your first payment) and never were current again. But you can start improving your credit score before those debts disappear from your report. And the older those debts get, the less they will hurt your score.

The amount of time it takes for your credit to start improving will largely depend on your credit history. If those settled debts are somewhat of an anomaly for you — you’ve successfully paid off several debts in the past — that will help your credit rebound. That shows lenders you are capable of paying your debts on time. Having other debt you’re still paying and are current on like a mortgage, car loan or other credit accounts will help, too. People with a fairly robust and positive credit history might be able to start rebuilding their credit score in six months or possibly as little as half that time.

If your credit history is skimpier, it could take much longer. For example, if you don’t have a history of paying off debt and you aren’t currently making timely payments on a mortgage, a loan or other credit cards. And if the accounts you settled were ones you’ve had for a long time, it could hurt your score because the length of your credit history (including the age of your oldest account) makes up 15 percent of your credit score. If you have a poor and/or thin credit history, it could take 12 to 24 months from the time you settled your last debt for your credit score to recover.

Either way, you’ll benefit from debt settlement if that means you’re no longer missing payments. It will also improve your debt-to-income (DTI) ratio, the amount of monthly debt payments you have compared to your monthly gross income, and your credit utilization, which is how much credit you have available versus how much you’re using. Lenders look at your DTI in the loan approval process and your credit utilization makes up 30 percent of your credit score.

How to rebuild your credit

The best thing you can do to build up your credit score is to pay your bills on time. Your payment history makes up the biggest slice of your credit score at 35 percent. The next best thing you can do, is keep your credit balances low, to keep a good credit utilization balance.

If you still have open accounts like a mortgage or credit card, make your payments on time. If after settling your debts, you don’t have many or any credit accounts left, you might consider asking a trusted friend or family member with good credit history to become an authorized user on one of their longer established credit cards. That will help you start rebuilding your credit history.

Why Resolve

Settling your debt can offer you relief, but only if the process helps you, and doesn’t put you farther behind. This is where Resolve comes in. We work to get you the best deal possible and offer you access to quality, professional guidance.

Debt settlement companies may charge high fees and don’t maximize your savings. Resolve prioritizes your needs. Service providers in the Resolve Network can help you achieve your goals with lower fees and sound advice.

Here’s how our pricing works:

  • If your debt is $30,000, your fee with a typical debt settlement company would be 20 to 25 percent of your total debt, meaning you’d pay between $6,000 and $7,500 in fees.
  • Your fees for that same service using the Resolve platform are 15 percent and are only charged on your saved debt. So assuming your $30,000 debt was settled for $15,000, you would pay just $2,250 in fees.

If you haven’t yet created a Resolve account, click here to get started.

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