After a debt settlement, many people are happy to find out that their debts have become manageable again. In fact, the process of debt settlement has helped thousands of people get in control again over their financial lives. Shortly after going through debt settlement, however, there are a number of people who are surprised to discover that their credit scores have dropped.
During the debt settlement process, a person will have their debts negotiated down to smaller amounts. Often, a bank will agree to waive penalty fees and interest charges. In some cases, it is also possible to get a bank or lender to forgive part of the principle of a loan. In actuality, however, the lender or bank has charged off the debt.
When a bank or lender charges off a debt, it is immediately reported to the credit bureaus. How much a charge-off will affect a credit score is dependent on a variety of factors, including the amount charged off, the consumer’s credit score prior to the charge-off, and other influences. In general, though, consumers have reported their credit scores dropping by as much as two hundred points after going through the debt settlement process.
In addition to this, it has also been widely reported that many people who have gone through the debt settlement process have found that they are unable to get a new loan afterwards because their credit score has dropped. Fortunately, there are ways for people who have gone through the debt settlement process to improve their credit score.
To start, make a new budget that will ensure all debt payments are made on time. Missing a payment or even making a late payment can reduce a score by about twenty or more points. Making on time payments for the full amount of the minimum required, however, will help a person to slowly improve their credit score over time.
It’s important to remember that a credit score is meant to show banks and other lenders how good of a credit risk you are considered to be. Someone who has just gone through a debt settlement often needs some time to make a new budget and get used to it before becoming eligible for a new loan. While debt settlement by itself will not lower a credit score, the missed or late payments and forgiven loan balances can lower a credit score.
Next, pay off some of the smaller bills. Try to pay off the loans you have with balances so small that they can be paid off within a few months. By paying off these bills, not only will you reduce the monthly volume of paperwork you have to deal with, but you will also be improving your credit score.
As you pay off each account, there will be an immediate improvement in your credit extended to credit used ratio. This ratio accounts for about thirty percent of a credit score. It tracks how much of the credit that has been offered to you that you have actually used. People who have a lot of credit offered to them but who use very little of that credit are consider to be better credit risks than people who have used nearly all of the credit that has been extended to them. In addition, as a person is able to pay off their debt, this ratio improves and the result is a higher credit score.
Sometimes, there is no way to immediately improve a credit score after going through a debt settlement. It’s important to understand that there is no way to immediately fix a credit score. While reducing loan balances and making on time payments can help, there is no way to get a credit score back to where it was within a few days of going through a debt settlement.
In many cases, the best thing to do is simply wait for your credit score to improve. By keeping up with your bills, you will see your credit score go up.