How Long Does It Take to Improve Credit Score After Debt Settlement?

If you had debt that you could not pay in the past and you resorted to debt settlement to pay off your debt, you might be wondering how debt settlement affects your credit score and how long it takes to improve your credit score after settling the debt? We will discuss the answers to these questions in more detail below.

How Long Does It Take to Improve Credit Score After Debt Settlement?

If you have settled your debt, it will take 18 to 24 months to improve your credit score after debt settlement. That said, a settled account will remain on your credit report for seven years from the date it was settled and will hurt your credit score so long as it remains on your credit report. After the seven-year period ends, the settled account will be removed from your credit report and your credit score will only then fully recover provided that nothing else is bringing your credit score down.

However, if you were delinquent on making payments on your account, your account will be updated to reflect the fact that it was settled and will remain on your credit report for seven years from the date you first became delinquent on making payments. This date is referred to as the date of original delinquency.

How Does a Debt Settlement Impact Your Credit Score?

Every credit card and loan that you have will report your account status to at least one of the credit reporting bureaus. So long as you make timely payments on your account, the positive account history will improve your credit score. But what happens when you settle a debt?

Debt settlement means that you have a past due debt and you have negotiated with your creditor to pay off the debt at a discounted price. For example, if you have a credit card with a $7,000 balance and your creditor agrees to settle the debt for $4,000 (less than what you owe), this is what’s known as debt settlement.

Settling a debt, although good for you, can and probably will hurt your credit score. Debt settlement will hurt your credit score because when you settle a debt, a notation is added to your credit report, indicating that the account has been “settled” or “paid settled.”

While having an account that you have settled is better than having an account that shows up as “unpaid,” the “paid settled” notation will have a negative impact on your credit score because the account has not been paid as originally agreed upon. So, debt settlement will have a negative impact on your credit score.

Why Is Improving Your Credit Score After a Debt Settlement Important?

Improving your credit score after debt settlement and maintaining a good credit score in the United States is extremely important because credit scores play a great role in our ability to do things, such as buy a home, rent an apartment, and finance a car.

This is so because your credit score represents your ability to pay back the money that you borrow from lenders and creditors. Lenders, creditors, and landlords often look at your credit score to determine the risk that you pose to them. Usually, the higher your credit score, the more favorably you’re viewed by them because you pose a lower risk of defaulting on your obligations.

Also, the higher your credit score, the better the terms you will qualify for. For example, if you have a very good or excellent credit score, you will qualify for the best interest rates on credit card and loans, and you’ll qualify for higher credit limits. Having a low credit score will make it difficult for you to find housing and credit card with good interest rates.

The credit reporting bureaus don’t provide the exact method of calculating your credit score, but they do provide some of the factors they look. The following factors play a role in calculating your credit score: payment history, credit utilization, age of your accounts, your credit mix, and whether any derogatory (negative) information appears on your credit report. So, how do you improve your credit score after debt settlement? We will discuss this in much detail below.

How to Improve and Raise Your Credit Score After Debt Settlement?

There are a variety of actions that you can take to improve your credit score after settling your debt. Here are some of those actions:

  • Make Timely Payments – Your payment history accounts for 35% of your credit score. So, to improve your credit score, make sure to make all of your credit card and loan payments on time. Missing even a single payment can damage your credit score for years to come. So, make sure to make all your payments on time to improve your credit. In addition to making debt payments on time, make sure to pay your utility and medical bills. We recommend doing this because if you fail to pay such a bill, it could be sent to a collection agency that will add a collection account to your credit report, severely damaging your credit score. So, make all your payments on time to avoid damaging your credit score.

  • Pay Down Your Balance – One of the quickest ways to improve your credit score is to pay down the balances on your credit cards. Credit utilization (how much of your available credit) accounts for 30% of your credit score. As a rule of thumb, you should not use up more than 30% of your available credit score as this will lower your credit score. For example, if you have a $10,000 credit limit, you should not keep a balance of $3,000 or more on your credit cards as this will lower your credit score. Paying off balances to lower your credit utilization below the 30% mark will improve your credit score and show lenders that you’re not too reliant on credit.

  • Don’t Apply for Too Many New Credit Cards and Loans – To improve your credit score, you should focus on your open accounts and you should avoid applying for too many new credit cards and loans within a short period of time. This is so because each time you apply, the creditor places a hard inquiry on your credit report, and while a single hard inquiry won’t cause significant damage, too many hard inquiries will significantly lower your credit score. So, apply for as much credit as you need.

  • Keep Old Accounts Open – To improve your credit card after debt settlement, you should keep old accounts that are in good standing open. This raises your average account age, which in turn improves your credit score. So, although it may be tempting to close an old account, keep it open, especially if it’s in good standing.

  • Check Your Credit Report and Dispute Inaccuracies – You should get into the habit of checking your credit report at least once a month. If you find any inaccuracies on your credit report, such as a collection account that does not belong to you, you should dispute it through the credit reporting bureau reporting the inaccurate information. Derogatory items can have a devastating impact on your credit score. So, dispute them and ensure that everything is accurate to improve your credit score.

What are the Pros and Cons of Debt Settlement?

Pros of Debt Settlement (Advantages)

  • The ability to settle (pay off) less debt than what you actually owe
  • Help you pay off your debt instead of having to file for bankruptcy
  • Debt settlement will stop creditor and debt collectors from harassing you for payment

Cons of Debt Settlement (Disadvantages)

  • It’s often difficult to negotiate with some creditors
  • You may have to pay high fees to a debt settlement company to negotiate with your creditors to settle your debt
  • Debt settlement can have a devastating impact on your credit score since you may stop making payments on your debt while you save up enough money to make a lump sum payment to settle your debt

Credit Score Planet Frequently Asked Questions

1) How do I raise my credit score after debt settlement?

To raise your credit score after debt settlement, you should make all of your credit card, loan, and bill payments on time, you should keep your credit utilization low, lower balances, keep old accounts open, and periodically check your credit report to ensure that no inaccurate information is lowering your credit score.

2) How much does debt settlement affect your credit score?

Debt settlement can have a devastating impact on your credit score. It could lower your credit score by more than 100 points. That said, the affect it has is different from one person to another depending on the number of affected accounts and other derogatory information that is in your credit report.

3) Is it debt settlement really worth it?

You should speak to your financial advisor to advise you as to whether you should settle your debt, consolidate it, or file for bankruptcy. Each situation is different and consulting with a financial advisor is your best bet.

4) How long does it take to rebuild my credit after debt settlement?

After settling your debt, it may take between 18 to 24 months for you to begin noticing improvements in your credit score. Following the practices we have outlined in this post will assist you in improving your credit score as quickly as possible.