Graduating from a debt settlement program is reason to celebrate. Bake a cake, invite some friends over and be proud of your accomplishment. Or at least pat yourself on the back. Now is the time to put your improved financial habits to use and make good financial choices.
Getting a credit card after debt settlement is another way to celebrate and can help make your financial life a little easier. It’s not difficult if you follow a few rules and tips.
How does debt settlement affect your credit score?
In the short term, your credit score may drop during debt settlement. A four-year study by Freedom Debt Relief (FDR) revealed that debt settlement client FICO scores fell a median 161 points during the first six months of enrollment, eventually improving by a median 191 points to end up higher than before enrolling.
The amount of damage you can expect depends on where your credit score is before enrolling in debt settlement. If your credit score is high and you stop making payments on your accounts, it'll likely plunge sharply. If you’re already missing payments, your starting score is lower and you’ll probably notice a much smaller drop.
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What credit score do you need to get a credit card?
Credit card companies establish guidelines for every card they offer, and minimum credit score requirements vary. You won’t qualify for most mainstream credit cards following debt settlement.
However, there are credit card companies offering second chance or credit-building cards to people like you—consumers with low credit scores (or even no credit score) who are ready to successfully manage a new account.
How to build credit with a secured credit card
Most credit cards marketed as second chance or credit building are secured credit cards. These require you to put up a security deposit to cover some or all of your credit limit. Secured credit cards can have hefty fees, so shop carefully and choose an affordable option. They’re out there.
The card issuer will only touch this deposit if you fail to pay your account as agreed. You use the card just like you would a traditional card and make payments every month. Secured credit cards don’t look any different than “regular” credit cards, and no one can tell when you use them that they are secured cards.
By making small purchases with the card and paying your balance off every month, you’ll build a solid repayment history. When shopping for a secured credit card, make sure that it reports your payments to all major credit bureaus to improve your credit scores.
Manage a secured card successfully for six to 12 months. At that point, your card issuer may return your deposit and convert the account to a regular unsecured credit card. Or it might increase your credit line without requiring more money from you. Or you can apply for an unsecured card yourself and close the secured account to get your deposit back and potentially save on fees.
How do you use a credit card after debt settlement?
Understand that you shouldn’t use your secured card to pay for things you can’t otherwise afford. You’re using it to build a good credit score and eventually qualify for other types of credit like auto loans, prime credit cards, personal loans, and mortgages.
Don’t blow it! Use your new credit card for small purchases and pay off your balance every month. Payment history is the biggest factor in a FICO Score. Some other ways to best use a credit card after debt settlement include:
Don’t use too much of your available credit, called amounts owed or credit utilization. This is the second biggest factor affecting your score. People with good credit typically have low utilization. Use your card sparingly and never max it out.
Don’t take on new credit if you’re struggling to pay off your current balances. Avoid carrying balances (and paying interest) whenever possible.
Check your credit reports for free to make sure the data is accurate and that you’re not a victim of identity theft.
Apply for credit cards sparingly. As your credit score grows, creditors will contact you with offers for their cards. Every time you accept an offer and apply, you generate a hard credit inquiry, which drops your credit score.
Sign up for automatic payments on your card to avoid missing payments or making them late. You can also sign up for automatic reminders of payment due dates.
Avoid unnecessary fees or paying high interest rates. You can keep costs low by understanding your card agreement, paying on time, never taking cash advances, and paying off your balance as fast as possible.
FAQs
While it may be difficult to open a new line of credit with a lower credit score, debt settlement does not prevent you from getting a new credit card in the future.
Can I get a credit card after loan settlement? ›
Get a Secured Card
You must apply for a credit card if you do not already have one. You should be able to use credit even if you have a settled loan. Getting the most out of a credit card might help you improve your credit score and increase your chances of getting a loan.
Can you still use your credit card after debt consolidation? ›
If a credit card account remains open after you've paid it off through debt consolidation, you can still use it. However, running up another balance could make it difficult to pay off your debt consolidation account.
Can you open a credit card while on debt relief program? ›
You can't make any new charges on your existing accounts or get new credit cards until you complete the program. But you can get out of debt faster with total payments that are up to 50 percent less. It's also important to note that your credit counselors will help you set up a new budget when you enroll.
How long to recover credit score after debt settlement? ›
Whether it's missed payments or charge-offs, they'll stay on your credit reports for seven years. Fortunately, settling debt does not mean your credit will be in the gutter during those seven years. Negative information has less impact on your credit score over time.
Does debt relief cancel credit cards? ›
Your credit card accounts will be closed and, in most cases, you'll have to live without credit cards until you complete the plan. (Many people do not complete them.) Debt management plans themselves do not affect your credit scores, but closing accounts can hurt your scores.
Is it better to settle a debt or pay in full? ›
If you can afford to pay off a debt, it is generally a much better solution than settling because your credit score will improve, not decline. A better credit score can lead to more opportunities to get loans with better rates.
How to increase credit score after debt settlement? ›
2. How can I improve my CIBIL™ score after credit card settlement?
- Change your “Settled” status to “Closed” with your credit card company. ...
- Exhaust only 30% of your credit limit: Using up only 30% of the credit limit improves your CIBIL™ score and makes it high. ...
- Pay balances and dues in full from the start.
If you settle a credit card outstanding balance, you will have to negotiate with your credit card company to pay off your debt for less than the total amount owed. Once you make the agreed-upon lump sum payment, your debt will be considered paid off and the credit card company will close your account.
Does debt settlement close your account? ›
Most debt over $600 that's forgiven is considered taxable income and you'll need to report it on your annual taxes. Debt consolidation allows you to continue using your accounts once you pay them off. That's not the case with debt settlement since the lender will close the settled accounts.
You may also choose to communicate with your creditors during this time. According to data from Freedom Debt Relief, your credit score is likely to drop substantially during the first few months of your debt relief program. But after that first six months, credit scores trend higher.
What happens with debt relief? ›
Debt relief can take a number of forms, including reducing the debt, lowering the interest rate on it, or extending the period for repayment, among others. Creditors are often willing to consider debt-relief measures when the alternative is total default by the borrower.
Is debt settlement worth it? ›
Debt settlement is a risky way to reduce your debts. It will help you avoid bankruptcy, but depending on the settlement amount, you may be stuck paying extra taxes. Many debt settlement companies charge high fees and take years to negotiate your debts fully.
Is it worth doing a debt relief program? ›
Debt relief will also often give you a fixed payment plan and a set payoff date, which can also make it worth considering — as streamlining your payments can make it easier to manage while helping you save money on interest. "One of the biggest advantages of going through a debt relief program is the savings.
Is debt settlement the same as debt consolidation? ›
Debt consolidation and debt settlement are both financial strategies for improving personal debt load, but they are quite different in how they resolve different issues. Essentially, debt settlement reduces the total amount of debt owed, while debt consolidation reduces the total number of creditors you owe.
How bad does debt settlement hurt credit? ›
Debt settlement typically has a negative impact on your credit score. The exact impact depends on factors like the current condition of your credit, the reporting practices of your creditors, the size of the debts being settled, and whether your other debts are in good standing.
How long after debt settlement can I buy a house? ›
How Long After a Debt Settlement Can You Buy a House? There's no set timeline for how long it takes to get a mortgage after debt settlement. Your ability to qualify for a mortgage will depend on how well you meet the lender's requirements on the issues raised above (credit score, DTI, employment and down payment).
Is settlement good for a credit card? ›
Credit card payment settlements are only done in extremely rare cases, and issuers do not encourage it. You should consider a settlement as a last resort, and even then, there is a meagre chance that the issuer will agree to it without you making a lump sum payment.
