Settled credit card debt? Here’s how to rebuild your credit score fast

While repaying a credit card debt can provide immediate financial freedom, it also often causes a credit score to drop. Once you have settled a debt, it is important to rebuild your credit if you have future financial plans. This article lists useful ways to improve your credit score after a settlement.

Impact on credit score

In debt settlement, a debtor negotiates to pay less than is owed to creditors. While this may relieve some immediate financial burden, a settlement typically remains on your credit report with the status of "settled," which can dissatisfy your credit score and represent you as a risk to future lenders.

Steps to rebuild your credit score

• Status of "closed": Once you have satisfied your debt, ask the creditor for a repayment plan for any remaining balance due still owed. After the amount is fully paid, ask that the account status be changed from "settled" to "closed." This may positively impact your credit history.
• On-time payments: You want to ensure that you pay all future obligations on time, as payment history is an important part of the contributor that affects your credit score.
• Obtain a secured card: Using the secured card to rebuild a credit profile means using the credit responsibly, making on-time payments, and trying to keep the balance very low, or no balance at all.
• Low credit utilisation rate: Having a low credit utilisation ratio may improve your credit score as they demonstrate a history of sound credit behaviour.
• Credit report: Get a regular credit report to monitor progress, and to identify any mistakes on your credit report.
• Strengthen your credit mix: A strong credit mix may show that you are effectively managing a mix of credit types, such as revolving credit and instalment loans. A mixed credit type may improve your credit worthiness for most lenders.

Additional strategies for financial stability

1. Establish budget: Budgeting helps to ensure that you can make your payments on time, while also assisting you with not overspending.
2. Emergency fund: An emergency fund helps protect your credit by reducing the chances that you will have to borrow during a financial emergency.
3. Seek professional help: Professionals can give practical advice and provide assistance based on your specific situation to successfully navigate complex financial situations.

In conclusion, while the payment of credit card debt can have an immediate positive impact on your credit score, adopting proactive credit management and responsible financial behaviours, will assist you with your credit recovery. Following the steps above can help repair your credit profile and provide the opportunity to be in a better place for future financial opportunities.

Disclaimer: Mint has a tie-up with fintechs for providing credit, you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. Mint does not promote or encourage taking credit as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.