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How to Repair Your Credit After Debt Settlement

Posted on December 24, 2010

Debt settlement is a legal option available to financially strapped consumers who are struggling to recover from huge debt burdens.  Despite the fact that this option is perfectly legal and been in practice for many years before the recession, debt settlement is strong medicine for your debt problems.  It should be considered as a last resort option for individuals who have fallen behind on their financial obligations but want to avoid filing for bankruptcy.

What is debt settlement?

Also referred to as debt negotiation, debt settlement is a practice where an individual or a third party company hired to represent an individual, negotiates with a creditor to reduce the balance needed to pay off an account.  Most creditors are unwilling to negotiate a reduced payoff amount if an account is current, which is where problems with your credit first begin.  In order to negotiate with your credit card company you will likely have to be delinquent on your account which obviously affects your credit score.  With that in mind, understand that while a successful negotiation of your debt may help you reduce the amount owed, the process itself will damage your credit.

How to repair credit after debt settlement?

Consumers who have gone through the debt settlement process have a long road ahead to repair their credit.  Fortunately, despite the negative affect of debt settlement on your credit, the consequences are less severe than filing for bankruptcy.  Credit repair after debts have been negotiated can be accomplished with the following steps.

  • Keep some accounts open–  In most cases the process of debt settlement involves closing accounts which have been paid off via a negotiation.  If you have other accounts not included in the settlement process, keep those accounts open in order to rebuild your credit.  By keeping these accounts open you have the opportunity to establish a new and more favorable credit history.
  • Pay off other debts–  The one positive impact of debt settlement is that you reduce your overall debt burden.  In the long run this will have a positive impact on your credit.  To further improve your credit, make all efforts to avoid additional debt while at the same time paying down any debts that were not included in the debt settlement process.
  • Open a savings account–  Not only will opening a savings account help you in your quest to repair your credit, it will also make it possible to put money aside which can prevent future indebtedness- all of which is good for your credit repair.
  • Request favorable account status from creditor–  One of the easiest ways to quickly begin credit repair is by asking your creditors to report your account as “paid as agreed” or “paid in full”.  While not all creditors will agree to do this, making the request takes little to no effort and if the creditor is agreeable, the status will significantly impact your credit moving forward.

Debt settlement doesn’t have to deal a final blow to your already suffering credit.  In fact, if the process is successful and consumers take the right steps afterward, debt settlement can put you in a position to improve your credit moving forward.

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