How to Rebuild Credit After Settlement | Proven Steps

Introduction

Having a debt settled will sometimes provide individuals with the feeling that they’re opening a new page or a new chapter in their financial life. After having to go through the grueling process of dealing with payments, having to negotiate with various creditors, and eventually reaching an agreement with a settlement, many will then experience a sense of freedom that’s very welcome because now they can close that chapter of their financial struggle. But not too long after that sense of freedom sets in, individuals will then have to confront a rather bitter reality: that having a debt settled can provide a lasting entry on their credit report, an entry that can possibly damage their credit rating for decades to come.

If you ever get into this specific predicament, then the imperative here is that you don’t panic or get overwhelmed. There are millions of people who have actually been able to restore their credit ratings after having a settlement. This procedure will indeed need a lot of patience, persistence, and the execution of the appropriate strategies appropriate to your situation. The good news here is that getting into a settlement is not the end of the world with regard to your financial life; actually, this can be the beginning of a wiser and better-informed way to handle your finances here on out.

This comprehensive manual is meant to take you by the hand through each and every step of the way, explaining fully all that you should know about the process of restoring your credit after a settlement. You will learn helpful insights into how the settlement process itself will affect your credit rating and overall credit reputation, and the very specific things that you should now do after having had to go through a settlement. You will learn tested methods that have been proven to effectively restore people’s credit ratings and their financial reputations over the passage of time.

What is debt settlement, and how will this damage my credit?

Prior to reconstruction, you should be familiar with the damage.

• Debt settlement entails that you, as the debtor, and your creditor settle on a lower amount to be received by you as a final payment to settle your outstanding account. That is, instead of having borrowed an amount of $10,000, you may actually settle on a new amount, perhaps around $6,000, to be received by you as a final settlement of the debt.
• In the information of your credit report, you will note that the individual account is marked with the “settled” status instead of being marked “paid in full.”
• Consequently, you will likely endure a loss of your credit score, potentially anywhere from 100 to 150 points, and potentially even more should you already possess an excellent credit score.
• The settlement is kept on your report for a 7-year duration after the date of delinquency.

Example: There are two people. Sarah pays off her whole debt, and John pays less. In their reports:

The report by Sarah reveals the payment standing “Paid in full,” information that significantly contributes to her believability and builds considerable trust with potential lenders.

John’s history reveals the “Settled” category, and this is one important flag of potential hazard.

That is precisely why, following having been through a settlement, reconstruction of one’s credit is of paramount importance.

Step 1: Review your credit report after having closed your settlement.

The very first step that you will need to undertake after having concluded the process of settlement is to review very closely the correctness of your credit report. It is important to note that mistakes and errors within credit reports are far more common than initially supposed.

1. You will want to obtain free copies of reports by the three largest credit reporting companies, i.e., Experian, Equifax, and TransUnion. Be aware that you can lawfully obtain one free credit report annually through the actual site AnnualCreditReport.com.
2. Verify the settlement status. Ensure that the account reflects “settled” or “paid — settled.”
3. Look for errors. Sometimes the account balance is not reflected by the creditors or the account is mistakenly designated to stay open.
4. Dispute mistakes. If you see wrong information, file a dispute online with the credit bureau. They must investigate and correct errors within 30 days.

Pro Tip: It is extremely recommended to keep copies of both your settlement agreement and the receipt of payment that you were given. There might be a future date when you might need these documents, should any imbalances or mistakes occur down the line.

Step 2: Develop an Overall Budget and Formulate a Detailed Financial Plan

Rebuilding credit is not merely a matter of manipulating numbers or statistics. It involves a significant transformation in one’s habits and behaviors regarding finances. Settlements typically occur as a direct result of facing financial difficulties and challenges, which means that now is the perfect opportunity to take charge and assert control over your financial future.

• Track each dollar. Account for your income and your expenses.
• Save money on avoidable expenses. Cancel any subscriptions that you don’t make use of, cook rather than ordering take-out, and don’t make impulse buys.
• Raise a fund of essentials. As small as $25 a week can add up to a savings kitty that will keep you debt-free during emergencies.
• Set financial goals. Like “Save $1000 within six months” or “Keep all payments up to date within 12 months.”

Example: Let’s say that you earn $2000 a month and spend $1800. So, you have $200 left. Save $100 and spend $100 to settle any other debts.

The budget will keep you on track and will help to avoid future credit issues.

Step 3: Ensure All Bills Are Paid on time

• The payment history accounts for a large percentage, namely 35%, of your credit report. This, therefore, means that even if you’re careful and effective with all other payment obligations, the penalty of failing to make payments can drastically affect your progress and prevent you from reaching your financial objectives.
• Make sure to pay each and every bill promptly and on time — this includes credit card payments, rent for your living space, utility bills, phone bills, as well as car loans.
• Schedule an autopay. Try to set up your account to charge payments automatically.
• Use reminders efficiently. A calendar reminder or a specialized app can go a long way to avoid late fees.

It is important to get up to date on your payments promptly. In the case that you miss one of your payments, ensure that you pay it off soon. Those that are over 30 days past due will affect your credit report the most.

If you ever pay your internet payment of $50 after the due date, there exists a possibility that this payment can be reported to the credit bureaus and can have an impact on your credit rating. However, by making this payment each month by the due date, you can, over a period of years, construct a good credit report that demonstrates your reliability and responsibility.

Step 4: Make an effort to apply for a Secured Credit Card.

• The best way to rebuild quickly is with a secured credit card.
• How it works: You put down a security amount (e.g., $300). That’s your credit limit.
• Use responsibly: Small transactions, such as gasoline or groceries.
• Pay the whole amount monthly. Never have to carry a balance on a secured card.

Upgrade: After having spent 6 to 12 months where you have proved to have a good track record financially, many banks will then upgrade you to an unsecured credit card. They will also set about refunding the deposit that you originally handed over.

If you utilize a sum of $100 every month and ensure that you pay it off punctually without any delays, the bank will recognize and report this positive financial behavior as activity. As the days go by and you continue this prudent payment trend, your credit rating will improve over time and will reflect these improvements.

Step 5: Being an Authorized User

• This is a very effective strategy and will provide fruitful outcomes if you actually have a trusty and reliable relative or close buddy with a favorable credit rating.
• Request that they list you as an authorized user on their credit card account.
• You don’t need to access the card now. The account with a positive payment history that is associated with the card is already reflected on your report.

Your score will keep building up as long as they can handle the account efficiently.

If your mother has a credit card that is older than 10 years and always maintained ideal payment discipline, then by being made an authorized cardholder of that account, you will automatically inherit the benefit of the ideal payment history of that account. It will fortify your credit report significantly.

Step 6: A person should maintain their credit utilization percentage extremely low.

• Credit utilization refers to the percentage of accessible credit that you actually utilize at any given time.
• Formula: (Credit balance ÷ Credit limit) × 100.
• Keep it below 30%. The highest marks that a student would normally get very often come from 10% or even smaller percentages. 
• Example: Suppose your credit card is at its $1000 limit and you owe $800. Utilization is poor (80%). Utilization is good (20%) if you’re only using $200.
• Having a low utilization of your credit accounts tells lenders that you handle your credit with care and responsibility.

Step 7: You Need to Diversify Your Credit Profile

Credit reporting agencies like to see a combination of numerous forms of credit on a consumer’s credit report. As such, if your credit report contains only credit cards, obtaining a small loan and putting this on your credit mix can improve your credit.

• Credit-builder loans are secured loans that many credit unions offer. Through these loans, payments that you make are safely stashed within a special savings account. When you make all of your payments, you will get to keep all of that money and benefit from the bonus of having a payment history that is considered positive.
• Short-term loans can be a viable option; if you can afford them, then this can help add a positive to your financial portfolio.
• If managed responsibly, however, student loans and car loans can be valuable and provide good financing.

Caution: Never take a loan that you will not be able to return just to enhance your score. Only take loans when you have to.

Step 8: Continually monitor and adjust your progress.

Rebuilding credit takes time, and that’s why you will have to keep track.

• Utilize free resources such as Credit Karma, Credit Sesame, or the credit scoring program through your bank.
• Monitor monthly variations.
• Don’t fret if your score swings up and down — improvement is a slow process.
• It is advisable to refrain from making an excessive number of hard inquiries, which are associated with new credit applications.

Pro Tip: A soft inquiry that can be triggered by any application or your bank will not have any negative impact on your credit report.

Step 9: Negotiating with Creditors to Receive Improved Terms

Even after you settle, you can have many things open to you:

• Goodwill letter: Write to your creditor, explain your hardship, and politely request that a goodwill erasure be made. There are some lenders that will erase negative remarks.

• Pay for delete: Sometimes you can negotiate by offering to pay an extra sum to have the settlement notation deleted (better to ask before settlement, but always inquire afterwards).
• Re-ageing accounts can be a potential solution that might be implemented by some lenders. They might choose to change the status of an account to “current” should you make a predetermined number of consecutive payments within a predetermined amount of time.

Example: A man closed a $5000 account. He then wrote a goodwill explanation of job loss. The lender agreed to take off the negative mark, improving his score.

Step 10: Always be consistent and patient with efforts.

Reconstruction is actually not an overnight process. It is rather planting a tree, which takes considerable time before it fully grows up and flowers:

• After 6–12 months of good payments, you’ll start to see improvement.
• Within 2–3 years, many of the damages will be minimized.
• Seven years later, the settlement drops off your report altogether.

Bear in Mind: Credit repair is a long-term process and not short-term.

FAQs: How Do You Rebuild Credit After a Settlement Has Been Reached?