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Debt Settlement – Restoring Your Credit

The debt settlement process will certainly damage your credit rating, because you are not paying the full debt amount. Take steps to restore it.

Why Debt Settlement Injures Credit Ratings

Debt settlement is a process by which debtors settle debts to creditors for less than is actually owed. Each debt is a reportable item on a credit report, and there are three major bureaus which receive these monthly reports on anyone who has credit of any type. The negative impact of debt settlement on credit ratings comes from three sources.

  1. Debt settlement only occurs after debtors have late and/or missed payments. Each incident of a late or missed payment reduces a credit score. If there are several missed or late payments, the damage can be pretty extensive.
  2. If the original debt is transferred or sold to a collection firm, the information is reported, and the credit score takes further hits.
  3. When the debt settlement is reached, the creditor or collection firm will usually report the debt as “settled,” or “negotiated for a reduced amount.” Again, there are hits to the credit rating.

Restoring Credit after Debt Settlement

You will need to take very deliberate steps in order to restore you credit after a debt settlement, and the process will take time, patience, and commitment.

  1. Do not be late with any payment of any kind that will be reported to a credit bureau.  Every late payment will continue to lower your rating.
  2. After a debt settlement, it will be difficult to obtain new credit cards without paying exorbitant rates and large annual fees.  Do not do this at first, unless you need one card for emergency purposes only.  Do not use that one card unless you have a true emergency – NO EXCEPTIONS.
  3. Get a pre-paid credit card from any bank.  This is a card on which you deposit a certain amount of cash, and you may then use it as a charge card for purchases, up to the amount of the cash you have placed on it.  Each payday, put some money on the card.  Each month, the bureaus receive a report that your credit card was paid in full.  This bumps your score each time.
  4. When you have completed this process for several months, make a small purchase on your emergency credit card – perhaps $50.  Pay off the entire amount when the bill comes due.  The next month, charge $100, paying off the entire amount when due.  After a few months, you will see your score coming up nicely.
  5. Eventually, you will receive an offer for a credit card with a relatively decent interest rate and perhaps not requiring an annual fee.  Take the card, and purchase small amounts each month and pay off the entire balance when the bill is due.
  6. 6.  You now have three credit cards – the secured one on which you put a small amount each payday and use, the “emergency” card on which you have regularly charged small amounts, and the unsecured card, on which you also have been paying the balance each month.  Your credit score has been rising each month.
  7. If, after a year, you are given the opportunity to renew the card with the annual fee, for another annual fee, do not do it.  Close the account.  You will be eligible for other cards for which there are no annual fees.

The Long-Term

The long-term solution to maintaining a good credit rating is to pay your bills on time, each and every month. Once you have spent a year paying off the entire balances each month, it will be time for a larger purchase which involves payments over a period of months. This builds your credit history, that is, your responsibility in making time payments over a longer period.

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