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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 its state. It’s impossible to repair it overnight. It may seem like rebuilding credit after debt settlement is a challenge. But by following a few simple steps and being consistent with your spending behavior, you will be well on your way to excellent credit.
How to Rebuild Credit After Debt Settlement: 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, which is the percentage of your credit limit that you’re actively borrowing. Remember, your credit utilization 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.
How to Rebuild Credit After Debt Settlement: Steps to Improve Your Credit Score
So what tangible steps can you take to repair your credit? Consider the following.
Pay your bills on time
One of the best things you can do is keep your current bills paid on time to improve payment history. For at least a year, be sure to spend 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 responsible behavior will 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. 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 obtain by pledging your assets as collateral). Because these are secured loans by collateral, even borrowers with abysmal 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 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 lines of credit falls below 30% of your credit limit, your credit score jumps up. So you should 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 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, avoid using your credit accounts for a little while — don’t close them altogether.
How to Rebuild Credit After Debt Settlement: Conclusion
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. Check out our top recommended secured credit cards, or 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.