Steps to Rebuilding Credit After Debt Settlement

If you have gone through debt settlement, your credit score has probably suffered in the process. So how do you rebuild credit after debt settlement?

First of all, congratulations on settling your debts! You’ve already taken the first step to repairing your credit, and that should be celebrated.

Second, remember that your suffering credit score took some time to get to the state it’s in. It’s impossible to repair it overnight. But by following a few simple steps and being consistent with your spending behavior, you will be well on your way to good credit.

What factors affect your credit score?

To improve your credit score, you must first consider what factors affect your credit score.

There are five primary factors which credit bureaus look at when determining your credit score. These are:

  • Your payment history, which accounts for 35% of your credit score.
  • Your credit utilization, the percentage of your credit limit that you’re actively borrowing, which determines 30% of your credit score.
  • The length of your credit history, which determines 15% of your credit score.
  • Your credit inquiry frequency, the frequency of hard inquiries for your credit score, determines 10% of your credit score. To clarify, when you apply for a loan or a new card, the issuer requests your credit score. When a credit bureau sees many of these requests in a row, it indicates that you’re borrowing heavily. This can be a risk factor for lenders. 
  • The mix of credit types you have determines 10% of your credit score. These include secured and unsecured loans, credit cards, and mortgages.

Want to improve your credit score? All you have to do is change your spending behavior to improve your standing in each of these categories.

How to improve your credit score

So what tangible steps can you take to repair your credit? Consider the following.

Pay your bills on time

To improve your payment history, one of the best things you can do is keep your current bills paid on time. For at least a year, be sure to pay at least the minimum balance on all of your bills by the time they are due. Your ability to pay your bills on time determines 35% of your credit score, so establishing a consistent rhythm of reliable behavior will definitely help.

Use credit responsibly

If you just got out of credit debt, it might be tempting to avoid using credit altogether. However, if you have no credit activity, your credit score will not change — it’ll be determined only by your past behavior. In order to build credit, you have to use it.

But what can you do to improve your credit score if you can’t qualify for any traditional loans or credit cards? Consider the following:

Use a secured loan to build your credit

If you can’t qualify for a traditional loan, consider a secured personal loan (a loan that you secure by pledging your assets as collateral). Because these loans are secured by collateral, even borrowers with very bad credit can qualify. And if you make your payments consistently, it will definitely help your credit score.

However, if you go this route, make sure that your lender of choice makes reports to the credit bureaus. No matter how responsibly you make your payments, it won’t improve your credit score if the credit bureaus never find out!

Get a secured credit card

Another way to improve your payment history is to get a secured credit card. You don’t need good credit to qualify for a secured credit card, and if you make your monthly payments consistently, it can really help your credit.

But again, remember to confirm that your credit card issuer of choice reports to the credit bureaus.

Pay down your balances 

When your balance for a credit card, loan, or other line of credit falls below 30% of your credit limit, your credit score jumps up. So you should definitely make more than the minimum payment each month if you’re able. The sooner you can shrink your balance, the sooner you’ll repair your credit score.

Your credit utilization (how much of your credit limit you’re actively using) determines 30% of your credit score. As such, paying down large balances can make a big difference to your credit!

Use different types of credit 

Having a mix of different types of credit helps your credit score. If you’ve only been using credit cards to borrow money, consider taking out a small loan; or if you’ve relied on personal loans, get a credit card!

Note that when you apply for a new loan or credit card, your lender will have to make a hard credit inquiry to evaluate your creditworthiness. In the short term, this “hard pull” will bump your credit score down by a few points. But in the long run, responsible payment behavior spread across a healthy credit mix will help your credit much more than the inquiry will hurt it.

Avoid closing credit accounts

If you’ve struggled with debt in the past, you may be tempted to close some or all of your credit accounts to avoid temptation. However, this behavior will actually hurt your credit score. That’s because it affects two of the factors that determine your credit score: your credit utilization and your credit history. Eliminating credit accounts lowers your total credit limit, hurting your balance-to-limit ratio, and resets your credit history back to zero. If you need to take some space, just avoid using your credit accounts for a little while — don’t close them altogether.

Conclusions

Rebuilding your credit can feel impossible, but with determination, sacrifice, and willpower, you’ll get there. Don’t borrow more than you can afford to pay off and make your payments every month, and you’ll be on your way.

Looking for a secured credit card or a secured personal loan to help you rebuild your credit? SuperMoney can help. Click here to check out our top recommended secured credit cards, or click here to find out what personal loans you qualify for. It’ll only take a few minutes, and pre-qualifying for loans won’t hurt your credit.