Melissa Lyken | July 21, 2022
Summary: Thinking a debt settlement is the only way out? Find out how long your credit score will suffer after you settle a debt with a lender.
For some of us, there may be a point in our lives in which we will struggle financially. Debts continue to pile up, and you may be unable to find the money to pay them off. In times like this, you may be able to arrange a debt settlement with your creditor or debt collector. While this will ensure that debt collectors will cease contacting you, a debt settlement will harm your credit score. Keep reading to find out how long it takes to improve your credit score after a debt settlement.
The disadvantage of obtaining a debt settlement is that it negatively impacts your credit score. Your credit score is determined based on records of your accounts and loans, the terms of agreement, late payments, outstanding balances, and credit limits. Your credit score is your creditworthiness. A good credit score is only applied to accounts that do not have late payments and paid off according to the original terms. High creditworthiness means a lower risk for the creditor as it demonstrates that you are capable of making payments on time. On the other hand, a low credit score indicates that you are a delinquent debtor.
While obtaining a debt settlement will allow you to settle with your creditor and end your obligation on good terms, it will still harm your credit score as you were only able to pay a portion of your debts. It will also not erase the fact that you are a delinquent debtor as you were unable to pay your debts. As such, when your creditor reports the closure of your account due to a debt settlement, it modifies the original contract of agreement, and your credit score is affected.
You will need to anticipate that you may have a low credit score after your debt settlement.
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For seven years, your settled accounts are reflected on your credit report. This means that for those seven years, your settled accounts will affect your creditworthiness. Lenders usually look at your recent payment history. There is a high probability that you will be affected for a couple of months or even years after settling your debts. However, a debt settlement does not mean that your life needs to stop. You can begin rebuilding your credit score little by little.
Your credit score will usually take between 6 and 24 months to improve. It depends on how poor your credit score is after debt settlement. Some individuals have testified that their application for a mortgage was approved after three months of debt settlement. Some needed years before they could get a new credit card or loan. It varies case by case and it is difficult to determine the exact timeframe required to improve your credit score. The time it takes to repair your credit score will depend primarily on your credit history.
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6 Months or Less: There is a possibility that if you have successfully paid off most of your debts and have settled accounts, creditors may still consider you a good debtor who can pay debts on time. If you still have open accounts after debt settlement with good records, this may help you get a credit rebound and improve your credit score. Even if you have a settled account the total assessment of your credit history can outweigh this by demonstrating that you have strong, positive credit, and your credit score could improve within the next six months or less.
12 - 24 Months: If your credit history reflects that you are a delinquent debtor, you have not paid off any part of your debt, there were a lot of late payments, or if it takes you years to settle your old debts you will have an extended period to wait before your credit score improves. A poor credit history tells creditors that you are a risk, and it will probably take 12-24 months for you to improve your credit score.
Remember that as your settled accounts age, their effect on your credit report will diminish even if they are still apparent. Take the initiative not to incur new debts, and your credit score will slowly improve. It will not improve overnight, so relax and do your best to become a wise debtor during this time. Avoid obtaining new debts while you are in the period of rebuilding your credit score.
A bad credit score will pass, and this chapter of your life will only last for a couple of years. Follow the advice provided here, and you will slowly make your way to a better credit score.
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How it works: SoloSuit is a step-by-step web-app that asks you all the necessary questions to complete your answer. Upon completion, you can either print the completed forms and mail in the hard copies to the courts or you can pay SoloSuit to file it for you and to have an attorney review the document.
>>Read the NPR story on SoloSuit: A Student Solution To Give Utah Debtors A Fighting Chance
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