After a debt settlement program, many people are happy to find out that their debts have become manageable again. In fact, the process of debt settlement has helped thousands of people get in control again over their financial lives. Can you even remember the last time your credit card statement had a zero balance? This is what settling your debts can do for you. Shortly after going through debt settlement, however, there are a number of people who are surprised to discover that their credit scores have dropped.
During the debt settlement process, a person will have their debts negotiated down to smaller amounts. Often, a bank will agree to waive penalty fees and interest charges. In some cases, it is also possible to get a bank or lender to forgive part of the principal of a loan. In actuality, however, the lender or bank has charged off the debt.
What Happens To Your Credit Score With Settlement?
When a credit card bank or lender charges off a debt, it is immediately reported to the credit bureaus. Usually as “Settled For Less Than Full Balance.” How much a charge-off will affect a credit score is dependent on a variety of factors, including the amount charged off, the consumer’s credit score prior to the charge-off, and other influences. In general, though, consumers have reported their Experian, Equifax and Transunion credit scores dropping by as much as two hundred points after going through the debt settlement process.
In addition to this, it has also been widely reported that many people who have gone through the credit card debt negotiation process have found that they are unable to get a new loan immediately afterwards because their credit score has dropped. Fortunately, there are ways for people who have gone through the debt settlement process to improve their credit score.
You Can Quickly Improve Your Credit Score After Settlement
To start, make a new budget that will ensure all debt payments are made on time. Missing a payment or even making a late payment can reduce a score by about twenty or more points. Making on time payments for the full amount of the minimum required, however, will help a person to slowly improve their credit score over time.
It’s important to remember that a credit score is meant to show banks and other lenders how good of a credit risk you are considered to be. Someone who has just gone through a settlement for less than full balance often needs some time to make a new budget and get used to it before becoming eligible for a new loan.
Next, pay off some of the smaller bills. Try to pay off the loans you have with balances so small that they can be paid off within a few months. By paying off these bills, not only will you reduce the monthly volume of paperwork you have to deal with, but you will also be improving your credit score. Making on-time car loan and student loan payments will help improve your credit score.
As you pay off each account, there will be an immediate improvement in your credit extended to credit used ratio. This ratio accounts for about 30 percent of a credit score. It tracks how much of the credit that has been offered to you that you have actually used. People who have a lot of credit offered to them but who use very little of that credit are consider to be better credit risks than people who have used nearly all of the credit that has been extended to them. In addition, as a person is able to pay off their debt, this ratio improves and the result is a higher credit score.
Sometimes, there is no way to immediately improve a credit score after going through a debt settlement. It’s important to understand that there is no way to immediately fix a credit score overnight. While reducing loan balances and making on time payments can help, there is no way to get a credit score back to where it was within a few days of going through a debt settlement. However, over a period of six to twelve months of on-time payments you will be able to see your credit score improving. In many cases, the best thing to do is simply wait for your credit score to improve. By keeping up with your bills, you will see your credit score go up.
Do not let the fear of a bad credit score keep you from getting out of debt.
The credit card companies, credit reporting bureaus and financial gurus have conditioned you to believe that you need to protect your FICO credit score at all costs. They use threats to keep you making your monthly payments that you can barely afford. You can settle your debts now and owe your credit card companies nothing and then you can work on fixing your credit score over 6 to 12 months. This is a small price to pay to become debt free.