How to Improve Your Credit after Undergoing the Debt Settlement Process
on Topics: Credit Card
Conquering your debt and successfully completing the debt settlement process is a huge achievement: You’ve made the choice to pay off your debt, worked with a debt relief company to negotiate a settlement with your creditors, and have worked hard to build up the escrow funds to pay off that debt.
While it will be a tremendous relief to find yourself debt-free, the debt settlement process does carry some consequences: As part of the debt settlement process, you will have stopped making payments on your debt (either because you were unable to make the payments or because you worked with your debt settlement company and decided that stopping payments in order to enter a debt settlement was the best approach to take). As a result, your credit score is undoubtedly going to have taken a hit.
However, do not let this discourage you from debt settlement, as it might be the best solution for you. There are many ways to improve your credit after undergoing the debt settlement process, and while the negative impact of debt settlement remains on your credit report for up to seven years, you can take small steps to boost your score in as little as a year or two.
Here are some steps you can take to begin to immediately improve your credit score after undergoing the debt settlement process:
#1. Stick to Your Budget
If you were able to succeed in paying off your debt through a debt settlement program, you likely developed a budget for yourself and stuck to that budget for the duration of the settlement process. Now is not the time to abandon your budget!
While the financial burden of your debt has been lifted, you want to be sure you do not get yourself back into debt, so sticking to your budget (or re-assessing and creating a new one that still works for you and keeps you away from debt) should be a primary focus.
#2. Get a New Credit Card to Start Rebuilding Your Credit
You read that correctly – credit cards might have gotten you into debt, but you shouldn’t void them after debt settlement. In fact, a credit card is key to help you raise your credit score and regain financial independence.
It will likely be difficult to open up a traditional credit card account after debt settlement, as creditors will be wary to lend if they are not certain they will be paid back in full. However, opening up a secured credit card is an option. Most credit cards are “unsecured,” which means they do not require any sort of deposit before you can use them. On the other hand, secured credit cards are just that – they’re “secured” by a refundable deposit which you give the credit card company in exchange for use of the card. Because the lenders have the security of the deposit, they will agree to open up a secured credit card for someone with poor credit.
#3. Become an Authorized User on Someone else’s Credit Card Account
If you have close family members or trusted friends with excellent credit histories, consider asking them to add you as an authorized user to their accounts.
An authorized user is someone who is added to a primary account holder’s credit card account and who has access to use that account. Authorized users receive credit cards in their own names tied to that account. This means you make purchases with the credit card under your own name, but you are not primarily responsible for the account or its activity – that is the primary cardholder’s responsibility.
Keep in mind, though, that it’s important to only become an authorized user on someone’s account if you trust him or her, as your score is affected by the primary cardholder’s activity, i.e., whether he or she pays bills on time and keeps credit utilization low.
#4. Use Your Credit Cards Responsibly
Just as you want to keep up your good habits when it comes to sticking to your budget, you also want to maintain good and responsible habits when it comes to using your credit cards. This means keeping your utilization low (no more than 30% utilization and, ideally, less than 10% utilization) and making sure to pay off your card, in full, every single month.
In the beginning, you might only be able to get a secured credit card or become an authorized user on someone else’s account, but you still need to maintain these good habits. Eventually, after your credit has recovered, you will be able to open up a traditional credit card and should continue using it responsibly to keep increasing your credit score.
#5. Be Patient
It probably took you a long time to build up the debt which led you to debt settlement and in turn a subpar credit score. This means that it will undoubtedly take time to rehabilitate your credit.
Nonetheless, if you follow this advice, stick to your good habits, and remain patient and perseverent, you will, in time, see your score slowly climb.