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How to Rebuild Credit After Debt Settlement

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If you have been forced to settle a debt, your credit score has probably suffered in the process. So how can 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 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 long does debt settlement stay on your credit report?

Unfortunately, settled accounts linger on your credit report for seven years from the day the settlement was reported. That means that if you’re looking to repair your credit score, you can’t simply wait around for the credit bureaus to drop the settlement from your report. Here is a detailed description of the time negative items remain on credit reports.

Fortunately, there are a ton of other steps that you can take to raise your credit score. But to learn how to improve your credit, we must first take a look at the factors which affect your credit score.

What factors affect your credit score?

There are five primary factors 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 currently borrowing. Remember, your credit utilization determines 30% of your credit score.
  • The length of your credit history. This 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? Change your spending behavior to improve your standing in each of these categories — with an emphasis on the first two.

How can you rebuild your credit after a debt settlement?

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

Pay your bills on time

The best thing you can do is to pay your current bills on time. Maintaining a healthy payment history is a surefire way to improve your credit. For at least a year, be sure to spend at least the minimum balance on all of your bills before 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 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 reports to the credit bureaus.

Keep your spending well below your credit limit 

When your balance on a credit card, loan, or other lines of credit fall below 30% of your credit limit, your credit score jumps up. So if you’re carrying a balance higher than 30%,  you should pay it off as soon as 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.

Become an “authorized user” on someone else’s credit card

If you have a trusted friend or family member whose credit is in good standing, ask them to add you as an authorized user on their account. This way, their responsible payment behavior, and low credit utilization will be reflected on your credit report. Just be sure not to take advantage of their kindness by drawing funds from their accounts!

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.

Monitor your credit report

When you’re working to rebuild your credit, it’s wise to keep an eye on your credit report and watch out for any potential errors.

Disputing errors on your credit report is relatively simple. Send a letter to the credit bureau and to the company which issued the misinformation to the credit bureaus. Your letter should include your name, the information that you’re disputing, copies of the financial records which prove your claim, and a request that the mistake is removed. You should also enclose a copy of your credit report, with the incorrect items circled or highlighted. Plus, be sure to pay for a “return receipt” so you can be sure that the credit bureau received your correction.

If you’re interested in monitoring your credit score, there are a ton of credit monitoring tools available to you!

Browse credit monitoring software.

Work with a reputable credit repair company

If you suspect that there are mistakes on your credit report, but you don’t know how to find them, a trustworthy credit repair company can help. These professionals are trained to find and remove negative misinformation from your report.

A reputable credit repair company will provide certain information in advance, including:

  • A written contract listing the services they’ll provide, along with your legal rights.
  • An estimate of the time it will take for them to get results.
  • The total cost of their services.

When shopping for a credit repair company, be wary of scammers. These opportunists know that customers seeking credit repair are typically in dire straits, and try to take advantage of their desperation. But as long as you are wary, you can sidestep the scams. When vetting potential credit repair companies, keep an eye out for the following red flags:

  • Unrealistic promises or guarantees.
  • Requests for payment in advance.
  • The company tells you not to contact the credit bureaus directly.
  • You’re asked to dispute the information you know to be correct.
  • The company suggests that you lie on an application.
  • They neglect to tell you your rights.

Browse top-rated credit repair firms.

Speak with a credit counselor

Another great option for if you’re overwhelmed by this process is to work with a credit counselor. A good credit counselor will review your finances and then help you put together a plan of action. With a step-by-step plan in hand, the prospect of achieving good credit should feel far more achievable. Best of all, if your budget is low, you can get credit counseling for free from many non-profit organizations.

However, as with credit repair companies, you should be wary of predatory companies. A good credit counselor shouldn’t make any unrealistic guarantees, and ideally should be licensed by your state.

Browse top-rated credit counseling firms.

What won’t help you rebuild your credit after debt settlement?

Not all responsible financial behavior will improve your credit. When working to improve your credit, you should be aware that the following actions will have no impact on your credit score:

  • Using a debit card.
  • Taking out a payday loan.
  • Using a prepaid card.
  • Working with a lender that doesn’t make reports to the credit bureaus.

When in doubt, be sure to ask each lender or credit card company whether or not they make reports to the three major credit bureaus. If they don’t, no amount of timely payments will help to repair your credit.

Getting started

Rebuilding your credit can feel impossible, but with determination, sacrifice, and willpower, you’ll get there. Make your payments in a timely fashion every month, and you’ll be on your way.

Are you 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.

Or if you’d rather enlist the aid of an experienced professional, compare credit repair firms here, or browse credit counselors here.