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How can I re-establish my credit score after a settlement?
How can I re-establish my credit score after a settlement?
By
David Pilley
on November 7, 2011
You may have recently had a successful credit card debt settlement, where your creditor agreed to take less than what was originally owed. Unfortunately, that is usually not the end of the story. For one, you still have to pay back a good portion, and you run the risk of defaulting again if you don’t have a reliable source of income. Unless you were insolvent at the time of the settlement, if the forgiven amount is over $600, you will have to
pay taxes on it
. Finally, your credit score will take a hit. It may drop over a hundred points, and it could be worse if the account says something other than “paid in full.” You will need to
re-establish your credit
if you want to make future purchases, such as a new car or a mortgage for a new home.
The first thing to do is to simply wait. A debt settlement stays on your credit report for seven years, and the older it becomes, the less damaging to your score it will be. You will have a difficult time getting any new type of credit in the months after a settlement, so
don’t
get any. You need a cushion in case you have another financial emergency, so
build up
your savings or retirement accounts. This should not be the time to make frivolous purchases or take a lavish vacation! After a settlement, you should also remember to get a copy of your credit report to make sure it is properly listed. If it does not say the account is closed or paid in full, contact your creditor immediately to fix it.
After you have saved up, you may venture into new plastic. You might get a prepaid credit card from a store. It acts more like a debit card than a credit card, so it might not actually rebuild your credit. However, if it’s from a certain store, it might offer rewards, such as discounts on prices. Nonetheless, you need to watch out for excessive interest rates.
If you want a sure way to restore your credit, get a
secured credit card
. You will have to make a security deposit in order to get one, and this deposit will be more than the eventual balance on the card. The balance allowed on a secured credit card is usually just a few hundred dollars, an amount you will never have to pay as long as you have a source of income. And, with every successive (and
timely
) monthly payment, your credit will slowly get better.
The road to recovery is never immediate and often slow. Such is the case with debt settlement. It may take several years, so don’t go overboard on acquiring new credit. It may mean living at or below your means for a while, but it is possible to improve your credit score after a debt settlement.
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