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How To Rebuild Your Credit After Debt Settlement

Man and woman in their 20s facing stage rightWe’re not very unbiased when it comes to debt settlement as a way to reduce your debts because after all that’s our business. However, we do understand that debt settlement will have a negative affect on your credit report and credit score. The reason for this is because for settlement to work you must have stopped or been unable to make the payments on your unsecured debts for at least six months. And not making payments on your debt for this long will definitely lower your credit score.

Get new credit

This may sound counter intuitive – since you got in trouble with credit in the first place– but the first step is to get new credit. As you might guess, you will have a problem getting a major credit card such as a Visa card or MasterCard. However, you should be able to get a gas credit card or a department store card. Failing this, you could always get what’s called a “secured” credit card, which is where you deposit money on the card and can then use it anywhere that accepts standard credit cards until you reach a zero balance.

Before you deposit money on one of these secured cards, make sure that the company will report how you handle the card to the credit reporting bureaus. If not, this will do you no good in terms of improving your credit report or credit score.

Credit cards for people with bad credit

There are also credit cards designed specifically for people who have bad credit. However, these cards usually come with a very high interest rate as the lender is taking more of a risk with you. For example, Orchard Bank offers three different credit cards specifically for people who need to rebuild their credit. It also offers a secured card, which is not a bad deal, as it requires only a $200 minimum deposit. There is also the Horizon Gold Credit Card and the Applied Bank® Visa Card, which comes with an interest rate of 23.99% and $9.95 monthly fee.

Build new habits

You probably remember the old saying, “keep doing what you’re doing and you’ll keep getting what you’re getting.” If you truly want to rebuild your credit, you need to replace your old credit habits with better ones. If not, the odds are that you’ll end up right back where you were before debt settlement. You need to quit charging items you can’t afford or making just the minimum monthly payments on your credit cards. You need to make sure you don’t become delinquent on any account and this includes even little ones like school lunches, medical bills and library fines. The reason for this is because more and more businesses are using collection agencies. And if one of your accounts lands in a debt collector’s hands, it will go on your credit report and stay there for seven years. This would definitely ruin any progress you’ve made to date.

Create “good” credit

You need to make sure you practice your good credit habits, as your credit won’t improve until creditors see that you have done what’s required to get a good credit score. At the risk of being redundant, this means charging only what you can afford and paying all of your bills on time every month. Also, don’t take on too many credit cards during this rebuilding, as it can be hard to manage multiple balances and payments. You really need only one or two credit cards to get started.

Follow these tips

Some other things you should do as you rebuild your credit are minimize your outstanding debt and be sure to avoid doing too much. You will not want to apply for credit needlessly. Credit applications show up in your credit report, which alerts lenders to the fact that you may be taking on new debts. It’s better to use your existing credit to prove that you can manage credit responsibly.

How long will it take?

Unfortunately, the majority of negative information on your credit report will stay there for seven years. However, if you follow the advice you’ve read in this article, it’s possible that in two to three years you can get your credit score up into the high 600s. While this will be enough to get credit, it wouldn’t be enough to get the best credit offers. You will need a score of 760 to get the best interest rates.

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