How Long Does It Take to Rebuild Credit After Debt Settlement?

If you’ve decided to get serious about tackling your debt, you’ve likely been wondering how long it will take you to rebuild credit and what happens to your score after a debt settlement. The truth is that the credit repair process takes time and a settlement can stay on your credit report for as little as two years or for as long as seven years. But, while those debts will be part of your credit history for years, that’s no reason to give up on repairing your credit. 

While your score may initially drop once you initiate the debt settlement process, it will slowly start to rise again once you pay off your debts and start to manage your credit more responsibly. You really do have the power to get your score back on track and improve your credit history. 

What Is Debt Settlement and How Does It Work?

Debt settlement is when you come to an arrangement with one or more of your creditors to resolve your outstanding debts by making a payment or a series of payments for less than what you actually owe. While creditors get less money back, they may agree to a debt settlement arrangement because they have more certainty that you’re going to make good on your debt and creditors would rather get less money than no money at all. 

You can arrange the credit repair process on your own, but the more popular route — and the one more likely to be accepted by creditors — is to use a debt settlement company to make arrangements with your outstanding creditors. Reputable debt settlement companies (also known as credit counseling companies) are experts at negotiating with creditors and have lots of experience administering debt repayment agreements. Creditors are also more likely to want to deal with a repayment professional than with individual debtors who may or may not be responsible enough to honour a debt repayment deal. 

There are various kinds of debt management plans, depending on the kind of debt and your credit history. If you have money on hand or can get a good debt consolidation loan, you may want an agreement that allows you to pay off your creditors all at once. Otherwise, you could set up a payment schedule that would be overseen by the credit counsellor. Usually, you pay the debt settlement company and they then make a lump-sum payment or make multiple payments over a set period of time to your creditors. Either way, you would end up paying less than what you presently owe. Of course, creditors don’t have to agree to a settlement option, but it’s certainly worth giving the credit repair process a try. 

How Does Debt Settlement Affect Your Credit Score?

While missing payments and accumulating debt is never a good thing, the debt settlement process will eventually get your credit score moving in the right direction. Unfortunately, the emphasis here is on the word “eventually.” There are specific ways that debt settlement impacts your credit in the short-term and the long-term.

When you settle debts, you are paying less than what you actually owe and credit bureaus will penalize you accordingly. Though credit bureaus don’t release exact numbers, you can expect your score after debt settlement to drop anywhere from 45 to 160 points or more. The amount of points you’ll lose depends on a long list of factors, including what score you’re starting with, what your credit history looks like, and when you pay off the debts in full. And there’s no getting around the fact that a debt settlement on your credit report may make potential creditors less likely to see you as creditworthy, at least initially. 

However, as your debts start to decrease and you handle your other credit accounts responsibly your score will slowly start to rise. If your credit score was strong to start with, you could see it rise in as little as six months, while those with a bad credit history might not see a change in their score for up to two years. It’s also worth noting that your credit utilization ratio could also improve as your debt load shrinks, which would boost your score. With time and perseverance, your credit will improve — just be patient with the credit rebuilding process and keep your expectations realistic. 

Does Debt Settlement Affect Buying a Home?

For most Canadians, a home is the single biggest purchase they will ever make, so it follows that a mortgage is the largest amount most of us will ever borrow in our lives. It should come as no surprise then to hear that lenders are going to put a lot of weight on your credit score and credit report when deciding whether or not to give you a mortgage. A debt settlement is going to be a huge red flag to a potential lender. They may assume that you aren’t good at managing debt and therefore it will be much harder for you to get a mortgage. Even if you can get a mortgage with an alternate lender who is more willing to take a risk on someone with a shaky credit history, you would then have to pay a much higher interest rate. 

That being said, if you have a debt settlement on file that shows you’ve paid off your debts and have since managed credit responsibly, you’ll have a better chance of getting a mortgage. That’s why it is advisable to at least wait a couple of years after you’ve paid off your debts to let your credit score and payment history recover before attempting to get a mortgage.

Can I Get a Car Loan After Debt Settlement?

It’s possible to get an auto loan after a debt settlement, however, you’ll likely have to go with an alternate lender rather than one of the big banks. There are numerous private lenders who give loans to those with a bad credit history but keep in mind that, because you’ll be seen as a potential credit risk, your interest rates will be higher. If at all possible, don’t apply for an auto loan until you’ve paid off your debts, that way you can show a potential lender that you’ve learned how to better manage credit.

How Long Will Debt Settlement Stay on Your Credit Report?

According to the Financial Consumer Agency of Canada, debt management plans will remain on your credit report for about two years once you’ve paid off all your debts (though it’s worth noting that other experts say it can take anywhere between three and seven years before a settlement comes off your report). A debt settlement professional will be able to give you a more accurate timeline.

One thing is clear: prioritize paying your debts off as soon as possible. The sooner you get them off your report, the sooner your score can bounce back. Remember, however, that credit reports are a compilation of many factors, and while the debt settlement may be removed from your credit file, the late payments from the account stay on your report for up to six years. The hard truth is that it can take many years for your credit report to recover from mismanaged credit, so it's smart to start the credit rebuilding process without delay. 

Note that debt settlement plans should not be confused with a registered consumer proposal, which is a more formalized, legally binding form of debt settlement that must be arranged with a Licensed Insolvency Trustee and stay on your report for three to six years. 

How to Rebuild Credit Following a Debt Settlement

Here are some good ways to start to rebuild your credit after debt settlement.

Check Your Credit Report Regularly

An important step you can take to rebuild your credit is to stay on top of your credit report. After all, you can’t control your credit unless you actually know what state it’s in. Regularly reading your credit report will also allow you to catch any account or personal information errors that could be negatively affecting your financial health. With Borrowell, you can download your Equifax credit report for free.

Dispute Errors on Credit Report

While Canada’s credit bureaus do a great job of making sure your credit report is accurate, accidents do happen. A key part of the credit rebuilding process is to fix any mistakes that could be negatively affecting your credit score. When you find an error contact the credit bureaus immediately to inform them of the inaccuracy and dispute the report error. Both TransUnion and Equifax have easy to follow information on their websites about how to submit a credit report dispute. 

Make On-Time and Full Payments on Your Bills

Payment history makes up 35% of your credit score. If you have a history of making late payments or of missing payments altogether, it will signal to potential creditors that you can’t properly manage your credit products. Rebuilding credit as quickly as possible depends heavily on your ability to prioritize paying your bills in full and on time.

Get a Secured Credit Card

Because you have to provide a deposit to get a secured credit card, they are easier to get than traditional, unsecured credit cards even if you have a history of bad credit. Best of all, your payments are reported to Canada’s credit bureaus so secured cards can help repair your credit score as long as you use them wisely.

Sign Up for a Credit Building Program

A credit building program, like Borrowell Credit Builder, is a subscription-based credit building product, where you make monthly payments that are reported on your credit report to help you build your credit history, payment history and credit mix. At the end of the term, you’ll also get a lump sum back from the payments you made. This is reported as an instalment tradeline on your credit report.

Keep a Low Credit Utilization Ratio

Credit utilization accounts for 30% of your score. Keep your ratio as low as possible (30% or lower is ideal) by keeping your credit limits high but your balances low. The more debt you carry, the less appealing you are to potential lenders.

Diversify Your Credit

Creditors like to see that you can manage a variety of credit products. Having at least two different types of credit accounts on your credit report is considered a good credit mix. There are four different types of credit accounts that you could have:

• Revolving credit (like a credit card or line of credit)

• Installment credit (like a personal loan or car loan)

• Mortgage

• Open credit (like a cellphone plan)

Having two of these four different types of credit accounts is beneficial because it shows lenders and credit bureaus that you’re able to manage different sources of credit and payments. If you have a credit card and a cell phone plan that you manage, that’s considered a good credit mix.

Maintain Old Accounts Open

Credit bureaus give higher scores to people with long account histories because it shows they have successfully managed credit products over time even as their financial situation changes through the years.

Have a Cell Phone Contract Reported to Credit Bureaus

Contact your cell phone provider to see if they report your payments to Canada’s credit bureaus (note that pre-paid contracts won’t be reported). Even if your provider doesn’t report your payments, you can help your score by paying your mobile phone bill with a credit card.

Build Credit with your Rent Payments

Including your rent payments on your credit report is an easy way to add a new credit line to your report without taking on any extra debt. Think about it: if you’re already making your rent payments on-time every month, then why not get extra credit for doing so? Get started on reporting your rent with Borrowell Rent Advantage^™. This is reported as an “open” tradeline on your credit report.