Debt settlement can be great for debt relief, but your credit score is likely to suffer. Once you have completed a debt settlement program, you can then focus on rebuilding your credit score. With care and following the steps outlined below, you can have your credit score repaired in as little as twenty-four months.
How Debt Settlement Affects Your Credit Score
When you decide to settle your debt, there are a couple factors that will negatively affect your credit score. First, your bills are probably being paid late, or they might not be getting paid at all, so those late or missing payments are reported to the credit agencies, affecting your score.
Second, your debts are often reported as “settled” and that typically lowers your credit rating a bit. If you do not pay your debts, they may be charged off (sold to a third party), and that affects your rating as well.
Don’t despair. There are a number of steps you can take to repair your credit rating. We’ll look at each one in no particular order. In fact, you can do most of these simultaneously.
Credit repair involves getting copies of every credit report and fixing any errors they may include. There are three main agencies: Transunion, Equifax, and Experian and several smaller companies. Start with the big three.
As you receive copies of your credit report, check to see how your settled debts are labeled. The hit to your credit is worse if they are ‘charged off’ instead of ‘settled charge off.’ It will take some time, effort and letters to get this changed, but it can be done. Once your debts are correctly labeled, you may be able to request that settled accounts are removed from your credit report.
If there are errors, dispute them. Occasionally, old accounts are not removed from your credit score. For instance, if you had a foreclosure more than seven years ago, it should be removed. Correcting small errors can help improve your scores fairly quickly.
You can get one copy free once a year from annualcreditreport.com
Pay Bills On-time
Pay your bills in full and on time. This simple and very important action is worth roughly 35% of your credit score! Timely payments mean that you are using credit responsibly and that makes credit agencies very happy. Set reminders, ask to have due dates changed to more financially advantageous dates, maintain a budget – do whatever you need to show that you are being responsible.
Secured Credit Cards
If you’ve gotten in the habit of overusing your credit card, take out a secured credit card. These cards have a credit limit backed by an upfront cash deposit you make before receiving the credit card. If you miss a payment, it comes out of the cash reserve. If you make the payments in full, it improves your credit report. Plus, the discipline will help you maintain a budget.
Calculate Your Debt to Income Ratio
The Debt to Income Ratio (DTI) is figured by dividing your monthly debt payments by your gross monthly income. The math is relatively simple.
Front-End DTI: Take your mortgage (principal, interest, insurance, property tax) or rent costs and divide by your gross monthly income – the entire amount you make before taxes are taken out. Multiply that number by 100 to get a percentage. Your front-end DTI should be less than 31%.
Front-End DTI Example
$1000 mortgage/ $1500 income = .66 x 100 = 66%
Back-End DTI: Add all your monthly debt payments including rent/mortgage (property taxes, and insurance payments), car loan/lease, revolving and installment credit (credit cards), and legal liability payments like child support, alimony, and tax payments. Divide this sum by your gross monthly income and multiply by 100. Your back-end DTI should be less than 44%.
Savings to Income Ratio: Add together all your monthly savings such as retirement, investment, and regular savings plans by your gross income. Multiply by 100. Your STI should be 10%.
Monthly Cash Flow: add together all monthly expenses, divide that by your gross income, multiply by 100. This number should be 100% or less. If it is more, you are spending more than you are bringing in.
Once you have these four numbers, you can see where you need to make adjustments to live within your means. This fairly simple math will help you to improve your credit rating indirectly.
How Long Does It Take to Rebuild Credit?
How long it takes to rebuild credit and improve your credit score after debt settlement depends on how your credit was before you started the debt settlement program. If you credit was thin (not much on it) or poor, it may take two years to see improvements, if you use your credit wisely and pay your debts on time.
Should I Settle or Pay Debts in Full?
If you can, always pay your debts in full. If you are in debt for more than $10,000 of unsecured debt and you are having trouble making even minimum payments, settlement may be your best possible option.
How Pacific Debt Can Help
Pacific Debt Inc is one of the leading debt settlement companies in the US. We can help you understand your options and whether or not debt settlement is your best option. If it is not, we will refer you to a trusted partner who may be more appropriate for your specific situation.
If you’d like more information on debt settlement or have more than $10,000 in credit card debt that you can’t pay, contact Pacific Debt, Inc. We may be able to help you become debt free in 2 to 4 years. We have settled over $250 million in debt for our customers since 2002.
Once you’ve completed our debt settlement program, your financial situation should start to improve. You’ll then be able to take the money you once had to pay towards your debt, and be able to use it for other purposes like saving it, investing, retirement, down payments, etc.
Pacific Debt, Inc is accredited with the American Fair Credit Council and is an A+ member of the Better Business Bureau. We rate very highly in Top Consumer Reviews, Top Ten Reviews, Consumers Advocate, Consumer Affairs, Trust Pilot, and US News and World Report.
Pacific Debt is currently providing debt relief coverage in the following states:Alabama, Alaska, Arizona, Arkansas, California, Colorado, District of Columbia, Florida, Idaho, Indiana, Kentucky, Louisiana, Massachusetts, Maryland, Michigan, Minnesota, Missouri, Mississippi, Montana, North Carolina, Nebraska, New Mexico, New York, Oklahoma, Pennsylvania, South Dakota, Texas, Utah, Virginia, Wisconsin
* Other states can be connected to one of our trusted partners
For more information, contact one of our debt specialists today. The initial consultation is free, and our debt experts will explain to you all your options.