How Long Does It Take To Rebuild Credit After Debt Settlement

There has been a noticeable change in the way we take and perceive indebtedness compared to a few decades ago. Before this time, there’s a social stigma attached to being indebted. It is even worse when you are unable to meet your obligations of paying off such debt. Additionally, individuals had little access to borrow huge funds, as we see today due to the requirements attached to accessing them.

The modern industry has seen a massive transformation in the 21st century, generally due to financial institutions’ relaxed lending prerequisites. What’s more, the present borrowers are assuming fundamentally more obligation than their folks from decades ago and are accordingly settling for that obligation at a slower rate. 

These huge obligation loads and more slow payoffs, combined with the present interest rates, imply that many borrowers could be taking care of these loans for quite a long time without mediation. One such intervention is “debt settlement.”

Debt Settlement Explained

Debt settlement explained

Debt settlement implies a lender has consented to accept less than the sum you owe as full settlement. It likewise means creditors can not keep on hounding you for payment, and you do not need to stress that you could get sued over the obligation.

Under normal circumstances, when you pay off your loans, your creditor updates your record to reflect the new status as “paid in full” or “closed.” The debt settlement process is similar. In this instance, your credit report will reflect “settled.”

According to The Balance, When a debt is settled, a creditor updates your credit report to show a status of “settled” or “paid settled.” While a “settled” status is slightly better than an “unpaid” status, any payment status other than “paid as agreed” or paid in full” can damage your credit.

Where you don’t have a history of late payment, also known as “delinquencies,” the settlement will remain in your record for 7 years from the date of settlement. On the other hand, if you fell behind on your credits, the history will stay on your credit report for seven years from when it initially became delinquent and was never current again.

You can start improving the status of your credit report before the end of the 7 years. Moreover, the older the settled debts, the less they can do damage to your credit report.

Rebuilding Your Credit After Debt Settlement

Lenders want to see that you are capable of paying your debt, and that is what your credit report tells them. The time it takes to start improving your credit after debt settlement depends mainly on your credit history. If you have successfully paid off some debts in the past, it will help your credit score begin to rebound.

If you have a reasonably strong positive credit history, you might be able to start rebuilding your credit in six months and possibly 3 months. This is especially possible if you have other loans you’re still paying on, such as car loans, mortgages, and other credit accounts that can help. On the other hand, if your credit history is not detailed enough or if you have a history of late payments and delinquencies, the time to rebuild your credit will take a longer time.

Also, if the records you settled were ones you’ve had for quite a while, it could hurt your score because the length of your financial record (counting the age of your oldest account) makes up 15% of your FICO assessment. If you have a poor record of loan repayment, it could take 12 months to 2 years from when you settled your previous debt for your FICO rating to recuperate. 

Does Debt Settlement Hurt Your credit Report?

Your credit report is one of the few things in life that will follow you due to its significance. Debt settlement may seem like a great idea and a cheaper way of getting out of debt, but it is risky for the following reasons.

  • It can take up to 2 to 4 years to complete the process of debt settlement.
  • Debt settlement will damage your credit score.
  • The cost involved in debt settlement is not necessarily cheap.

Whether you are successful at debt settlement, it can take years, and you may find you owe taxes on any canceled debts. What’s more, you’ll pay charges on the off chance that you use a settlement organization.

Factors That Make Up Your Credit Score

Debt settlement will no doubt ding your credit score and remain in your report for 7 years or more, and that seems like a very long time, but you can start working on rebuilding your credit score by understanding the factors involved and how each one weighs on your credit report.

There are three primary consumer credit reporting bureaus, ExperianEquifax, and TransUnion, and each has its credit scoring methodology like the FICO credit scoring model made during the 1950s.

Let’s consider these methods and how each one impacts your credit, and how improving them can begin to mitigate the impact of “debt settlement” on your credit.

Payment History

Debt settlement factors - payment history

Payment history makes up 35% of your credit records. Late payments, especially those over 90 days late, can ding your credit scores. The installments you’ve made on things like credit cards, your vehicle loans, and even student loans make up your payment history.

If you’ve never made a late installment, odds are your installment history is giving your FICO ratings a pleasant lift. Start ensuring that your loan installments are paid when due and avoid delinquencies.

Credit Utilization

The second most significant factor in FICO ratings is your use rate. The measure of credit you’re using compared with your general credit limit. On the off chance that you will, in general, carry high balances on your credit cards, paying off that obligation burden will improve your usage rate.

Potential creditors DTI (debt-to-ratio) in the loan application process and your credit utilization make up 30% of your credit score. Your DTI is the amount of debt payment you have every month compared to your gross income, while Credit utilization is how much credit you have available versus how much you are using.

For instance, if you have a $10,000 credit line and have used up $7,000 in purchases, that equals 70% credit card utilization. It’s best to keep your percentage below 30%.

Length of Credit History

Length of credit accounts for 15% of your credit score. It measures how long you have a credit in your account, and if the account you settled are the ones you have had for a long time, it will hurt your credit scores.

New Credit

New credit makes up 10% of a FICO Score. When you apply for new credit, inquiries remain on your credit report for two years. FICO Scores only consider inquiries from the last 12 months.

Credit Mix

This accounts for 10% of your credit scores. Lenders like to see that you have borrowed and paid back different types of credits, or at the very least, you are not late or have never been late in meeting your obligations.

Avoid Settlement Status on Your Report

Avoid Settlement Status on Your Report

Your credit report is a history of your past and present financial transactions. It contains details about how you have managed your credits if you have been making your payments when due. It shows the terms, length, size, and outstanding loans.

After all the lengthy negotiation and agreement, the status of your settled loans becomes “Paid-settled.” This can keep your credit score down for a long time because it doesn’t have the same impact as “paid as agreed” or “paid in full.”

Another option is to talk with your creditor ahead of time. They can report your account as “paid in full,” even when the agreement was a settlement. This will not hurt your score as much as the “paid-settled” status.

Types of Debt to Settle

Your creditors will naturally be unwilling to settle current and serviced loans with no delinquencies. Your best option is to try to settle older, past due, and debts that have been transferred to a collection company. As your late payments get older, the less impact they have on your credit score.

Note that when settling a debt that was sent to collectors more than three years ago, settling such outstanding will reflect on your report as a current collection. It’s essential to be on the same page with the creditor before finalizing the settlement.

Similarly, bigger balances have a proportionally more significant effect on your FICO rating as with all obligations. If you are settling little records, especially on the off chance that you are currently on other, bigger loans, at that point, the effect of repayment might be immaterial. Additionally, settling different records harms your score more than paying only one.

The larger the settled balance, the more impact on your credit score. If you choose to pay smaller loans while still servicing bigger loans, the effect is usually minimal. Also, it’s advisable to settle just one account instead of multiple accounts, which would, in turn, have a substantial negative impact on your score. 

Taking it Home

It may sound better to have a settled account than an unpaid delinquent account, but you must understand the length of time the settlement will appear on your credit report. You could also get strategic with your settlement plan by agreeing with your creditor to have a “paid in full” status reported.

Finally, only take loans you can pay back, and when there’s a change in your finances that will lead to delays, reach out to your creditor and have a new arrangement to the terms of payment.

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