First of all, congratulations! Settling your debt is a huge step forward in the journey to financial freedom and one that you should be very proud of. Taking responsibility for the money owed and working to reach an agreement with creditors is hard work, but one that will pay off in the long run.
However, debt settlement doesn’t come without its downsides. Although less harmful than bankruptcy, debt settlement will lower your credit score and impact credit history. Eventually, you’ll be able to build your credit score back up – just make sure you’re using credit wisely, and not living beyond your means.
The Columbia Daily Tribune has this to say about debt settlement in a recent article titled “Rebuild history in three steps”:
You have done the most essential thing you could do to impress a lender. You have paid what you owe. Yes, you settled an account, but you took the time to hammer out an agreement that was satisfactory to you and the debt collector. So, even though you show a settled account [on your credit history], that’s preferable to an unpaid charge-off. Even lenders realize everyone makes mistakes.
So how do you begin rebuilding your credit after debt settlement? We suggest the following:
- Change Your Habits: What good is getting out of debt if you’re going to repeat the same financial blunders? Seek help from financial advisors who can help you examine your income and expenses, and make a budget that suits your lifestyle. Be sure to factor in a savings account, in the event unexpected expenses arise.
- View Your Credit Report: You can’t get where you’re going if you don’t know where you’ve been – and the same is true for rebuilding credit. Sites like AnnualCreditReport.com allow you to view and track your credit score each year, so you can see the progress being made.
- Pay On Time, Every Time: Actions speak louder than words, especially to banks and creditors. To truly prove you’ve reformed your bad habits, make sure you pay every bill – mortgage, car loan, electricity bill, etc. – on time, every time. Avoid putting anything on credit cards, but if you must, try and pay the full balance at the end of every month. Above all else, be sure to pay yourself – it’s the most important investment you can make.
- Investigate Secured Loans and Credit Cards: If you must take on a credit card or loan, secured loans are the way to go – and sometimes the only way to qualify. “Secured” simply means that your savings are being held in a special account as collateral for the line of credit. This money will be returned to you once the debt is paid or the secured credit card account is closed. Typically, the line of credit is very small at the outset, but your good repayment performance may mean credit line increases in the future.
