When you settle your debts, it will reduce your credit card account to zero, which is always a good thing. You do not have to worry about the monthly payments and interest rates. You can now rationalize your household budget better.
However, there is no such thing as a free pass. It will have an impact on your credit score. With debt settlement, the creditor will take on a loss.
For instance, you have an outstanding balance of $8,000, and the creditor agrees to slash it to $4,000, your credit report will show that you settled the amount for less than the total due. It will be marked as negative. It will stay on your record typically for the next seven years from the date of delinquency.
Debt settlement companies are mushrooming on account of the demand. According to Debt.org, in the third quarter of 2019, the total amount of credit card loans already breached the $1 trillion mark. However, credit card debts only accounted for about $26.2% of the total, which is an improvement from 38% in 2008.
For a long time, filing for bankruptcy was the default option for Americans to escape their debts. However, the 2005 Bankruptcy Protection Act laid down measures to make it harder for people to seek the help of courts. So, they turned to debt settlement companies instead.
Improving Your Credit Score
The next step, therefore, is to improve your credit score. The trick is to let the lenders know that you are working to improve your credit score, which includes updating your past due accounts.
Here are some ways how you can boost your score quicker:
- Keep track of your expenses. One of the first things you need to learn is to rationalize your budget. Reducing your credit card bill to zero is not a free pass to borrow money once again. The money that typically went to debt payment should go to your savings instead.
- Do not miss out or be late on payments. To let lenders know that you learned your lessons, you must pay on time going forward. They will look at your payment history through a microscope, so you have to make sure it is flawless.
- Use your cards every now and then because your credit history will also factor into your overall score. But use your card only if you already have the cash to pay for the amount. Do not swipe your groceries because you are expecting money to come.
- Keep track of your utilization rate. It refers to the amount you swipe relative to your credit limit. So, if your credit card limit is $8,000 and you always seem to max out, it will reflect badly on your score. Your aim is to reduce the balance of the revolving amount each month.
- Keep updated on your score. You can request a copy from TransUnion, Experian, and Equifax. Do it quarterly, so you always know your status.
Improving your credit score is not easy. It takes fiscal discipline and lifestyle change. If you are living large, it is time to cut down your monthly expenses on indulgences. If you live within your means and pay your bills on time, you will improve your credit score sooner than you think.