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10 Steps to Rebuild Credit After Debt Settlement

Sandra MacGregor

Feb 09, 2022 9 min read

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How to build credit after debt settlement.
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    No matter how bad your financial situation may seem, there’s always a way to tackle debt and get your credit back on track. One popular solution is to go with a debt settlement agreement. If you’ve gone the debt settlement route, discover how you can rebuild your score and re-establish a solid credit file with these 10 steps. 

    Check Your Credit Report Regularly

    Checking your report regularly is an integral part of the credit repair process because it will give you a comprehensive picture of your financial health. Remember that your credit score is made up of five main factors. 

    • Payment history (35%): The most influential factor making up your credit score, the more payments you make in full and on time, the more your credit score will rise.

    • Credit utilization (30%): How much of your available credit you use.  

    • Credit history (15%): The length of credit accounts like loans or credit cards. 

    • Credit mix (10%): How many different kinds of credit you have like loans and credit cards.

    • Credit inquiries/credit checks (10%): When potential lenders do credit checks. Too many and potential creditors take that to mean you could be getting into too much debt.

    Regularly reviewing your credit report means you’ll be able to see which of the above five factors you may need to work on. Another important reason to check your credit report is to catch any inaccurate information so you can get errors fixed quickly before they negatively affect your score. There are services like Borrowell that let you download your credit report for free.

    Dispute Errors on Your Credit Report

    Mistakes can happen. Even a small error — like a payment that was on time being mistakenly reported as late — could significantly drop your score. Errors on credit reports can include things like:

    • Wrong mailing address or date of birth 

    • Inconsistencies in credit card and loan accounts

    • Payments you made on time shown as late 

    • Open accounts reported as closed

    • Accounts that you don’t recognize (could be a sign of identity theft)

    Both of Canada’s credit bureaus, TransUnion and Equifax, have their own dispute resolution processes. As soon as you find an inconsistency on your report, follow the credit report dispute steps indicated on the credit bureau’s website to ensure the mistake is fixed as quickly as possible.

    Make On-Time and Full Payments on Your Bills

    Payment history is the single biggest factor influencing your score, so it’s vital to make account payments on time and in full. Just one late payment can drop your score by double digits. Being responsible about payments is the single best thing you can do to rebuild credit.

    Get a Secured Credit Card

    Don’t let bad credit stop you from getting a credit card. Secured credit cards are much easier to get than traditional credit cards because the cardholder has to provide a deposit to guarantee they won’t default on payments. Secured credit card payments are also reported to Canada’s credit bureaus and therefore can help build-up a credit score as long as they are used responsibly.  

    Sign Up for a Credit-Building Program

    Some companies like Refresh Financial offer a unique kind of credit builder loan product where you pay-off the loan before you actually get access to the money. Meanwhile, your payments are reported to a credit bureau and can therefore boost your score. 

    Keep a Low Credit Utilization Ratio

    Potential creditors want to see that you aren’t carrying an unmanageable debt load, so you should aim to use less than 30% of your available credit at any one time. The lower your credit utilization ratio, the easier it will be to get your score to rise.

    Diversify Your Credit

    Your credit mix makes up 10% of your credit score, and it can be a great way to show lenders and the credit bureaus that you can manage different types of credit. A good credit mix consists of having two different types of credit accounts open. So don’t just stick with credit cards or revolving lines of credit. 

    If at all possible, aim to have at least two different types of credit accounts open. Even a credit card (which is revolving credit) and a cell phone plan (which is “open” credit) is considered a good credit mix.

    Maintain Old Accounts Open

    Think twice before you cancel those old credit cards you’re no longer using. Credit bureaus like to see that you have a long history of carefully managing credit, so the longer you’ve had a credit card, the better. Cancelling a credit card can actually generate a sudden dip in your credit score. 

    Have Rent and Cell Phone Contract Reported to Credit Bureaus

    Some mobile phone companies report payments to Canada’s credit bureaus, so it’s worth reaching out to your provider to see if your payments are being reported. If they are, your cellphone payments can help you build your credit score over time. As long as you are making prompt payments on your account and it’s in good standing, it’s always beneficial to have another credit product on your credit file. 

    It may even be possible to have your rent payments become part of your credit report if your landlord is a member of the Landlord Credit Bureau. Programs like FrontLobby can help you work with your landlord to get your rent payments report to credit bureaus and help you build credit.

    How Do Debt Settlements Work?

    We’ve done a comprehensive overview of how to rebuild your credit after a debt settlement, but you may still be wondering how the debt settlement process works and whether or not a debt settlement is the right option for you. 

    Debt settlement is when you and your creditors come to an agreement that you’ll pay off your outstanding debts for less than you actually owe. While the creditors get less money, they are often willing to do so because they have more certainty that you will actually make payments. Usually, you’ll have to agree to give creditors a lump-sum payment or stick to a strict monthly payment schedule. 

    Because a debt settlement is a more informal kind of payment process than a consumer proposal (which is a legally binding agreement done with a licensed trustee), you can arrange a debt settlement with your creditors on your own. You also have the option of using a professional debt settlement company (sometimes called a debt counselling service) to oversee the debt settlement process. 

    This is often advisable because creditors are more likely to trust and be willing to work with a professional debt management company. Be cautious, however, because there are many different types of debt settlement companies out there and not all are reputable. It’s crucial to do your research and vet any company carefully before you hire them.

    How Does Debt Settlement Affect Your Credit Score?

    While missing payments and accumulating debt is never a good thing, getting serious about the debt settlement process is a big step towards healing your credit score. There are specific ways that debt settlement impacts your credit

    Debt settlements and debt counseling services will stay on your report for anywhere from two to as many as seven years. While on your file, settlements will negatively affect your score and act as a red flag to potential lenders. That’s why, if at all possible, it’s always better to pay off your debts in full and promptly, rather than resort to a debt settlement. 

    But don’t let the fact that your score will initially take a hit get you down. Over time, as you engage in the credit repair process, your score will improve. Furthermore, as your debts are paid off, your credit utilization ratio will decrease, which will also help get your score moving in the right direction. Patience during the credit rebuilding process is key; it will take time but your credit will rebound.

    How Long Does The Credit Rebuilding Process Take After Debt Settlement?

    How long it will take you to rebuild your credit after settling your debts depends on a variety of factors, including:

    • The amount of debt you owe

    • How quickly you initiated the credit repair process and paid off your debts

    • How good your credit score was initially

    • Your overall financial situation (such as your credit history)

    • If your credit utilization ratio is below 30% 

    • Your payment history

    In general, you can expect to see incremental increases in your score after about six months and more significant increases in your score in approximately two years. 

    How Many Points Does a Settled Account Affect Credit Score?

    It’s natural to wonder what will happen to your score after debt settlement. Unfortunately, Canada’s credit bureaus don’t release exact numbers about how much a credit score will drop when you settle your debts. You can likely expect to lose anywhere from 45 to 160 points off your score initially. 

    There are a variety of things that influence how many points you’ll actually lose during and after the credit repair process, such as your credit history, how high your score was to begin with and how many missed or late payments you have with the account. It will also depend on how many debts you’re settling. If you work with a settlement company, they should be able to give you a better idea of how big of a hit your score will take. The thing to keep in mind is that, while your score will take an initial hit during credit rebuilding, getting a debt settlement plan in place will eventually lead to a stronger score once you’ve taken care of the bad debts.

    How Long Does Debt Settlement Remain on Your Credit Report?

    Debt management plans stay on your credit report anywhere from two to seven years from the date the debts are paid off in full. To get a more accurate timeline, it’s best to ask the debt settlement expert. 

    Keep in mind, however, that credit rebuilding is a long process that requires patience and a lot of hard work. Even when you pay off your debts and get a settlement removed from your credit report, any late payments you made on the account will be part of your credit history for as long as six years. The good news, however, is that credit bureaus do look much more favourably on paid-off debts and so those debts will have less of a negative affect on your credit report than they would if you left them unpaid. 

    Can a Debt Settlement Be Removed from a Credit Report?

    Credit bureaus must maintain people’s credit files scrupulously. For this reason, unfortunately, they will not remove an item from your credit history or credit report until the set period of time has elapsed. They only remove items from a report if they were proven to be inaccurate. That being said, if you notice that your debt settlement remains on your report for longer than what you were told or expected, you can submit a dispute via the credit bureau’s website. 

    Sandra MacGregor
    Sandra MacGregor
     | 
    Personal Finance Writer
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    Sandra MacGregor is a professional writer who specializes in topics such as finance, travel, health, and lifestyle. Her work has been featured in the Toronto Star, the Montreal Gazette, and the New York Times. She is a regular contributor to the Borrowell blog.

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