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Steps to Take After Finishing a Debt Settlement Program

Steps to Take After Finishing a Debt Settlement Program

Finishing a debt settlement program can be a huge relief. You’ve finally gotten those burdensome debts off your back and have a fresh start financially. But now what? Your credit has probably taken a hit and you need to be strategic about rebuilding it. Here are some steps to take after completing a debt settlement program so you can continue on your path to financial freedom.

Monitor Your Credit Report

The first thing you’ll want to do is monitor your credit report regularly by getting free copies. You can get free reports from each of the three major credit bureaus – Equifax, Experian, and TransUnion – every 12 months at AnnualCreditReport.com. It’s important to check all three because they may have different information. Keep an eye out for any errors or fraudulent activity and dispute them immediately.

Also make sure settled accounts are being reported accurately with a zero balance. Accounts that have been settled through debt settlement should say “settled” or “paid in full for less than the full balance”. If not, you’ll need to contact the credit bureaus to get it corrected.

Hold Off On Major Credit Applications

Now is not the time to take on any new debt like a mortgage, auto loan, or credit card. Lenders will see your credit report and recent debt settlement activity as red flags so you’ll likely get denied or pay a much higher interest rate. Give it some time before applying for major credit.

Instead, focus on reestablishing positive payment history. Consider getting a secured credit card where you put down a cash deposit as collateral. Use it lightly and make payments on time to start rebuilding your credit score. After about a year you can try for an unsecured card.

Pay Down Debts

If you still have outstanding debts that weren’t settled, commit to paying them down. Your payment history and credit utilization ratio (amount owed versus credit limits) are big factors in your score. Making consistent on-time payments and lowering balances will help improve your credit.

Only make minimum payments on debts you’ll pay off last. Put as much money as you can towards high-interest debts first. Once those are paid off, roll that amount into the next ones until everything is paid. But don’t take on new debt in the process.

Hold Off on New Inquiries

Whenever a potential creditor checks your credit, it results in a hard inquiry on your report. Too many of these in a short period of time can negatively impact your score. Since you’ll already have inquiries from debt settlement, avoid applying for new credit unless absolutely necessary.

Soft inquiries from checking your own credit or from prequalification checks won’t affect your score. But hard inquiries when applying for credit will, so hold off if possible.

Fix Any Credit Report Errors

Comb through your credit reports closely and dispute any errors with the credit bureaus. Incorrect information like accounts that aren’t yours, incorrect balances, or duplicate listings can drag down your score. Get these fixed ASAP.

Submit disputes in writing and include copies of any evidence. The credit bureaus have 30 days to investigate and remove anything that can’t be verified. This can give your score a nice boost!

Ask Creditors to Remove Negative Marks

You can also ask creditors directly to remove negative marks related to your settled debts. Send goodwill letters explaining your situation and how you’ve learned from the experience. They’re under no obligation but may be willing to negotiate in exchange for your paying the reduced settlement amount.

Get any agreements for removing negative items in writing first. Be persistent and escalate your request if needed. If successful, this can help improve your credit score.

Become an Authorized User

Ask a family member or friend with good credit to add you as an authorized user on one of their credit cards. As long as they use the card responsibly, it can help rebuild your score. You typically won’t get a card of your own and aren’t responsible for payments.

Just being tied to their positive payment history can boost your credit. And you can remove yourself as an authorized user down the road once your credit improves.

Wait It Out

Time is one of the best ways to rebuild credit after debt settlement. Most negative information falls off your credit report after 7 years. As long as you continue making on-time payments, your score will gradually improve. Stay patient and persistent.

Older settled accounts will have less impact on your score as time passes. And your more recent positive payment history will start to outweigh those old negatives. So just focus on moving forward responsibly.

Consider Credit Counseling

If you could benefit from ongoing credit education and coaching, consider signing up for credit counseling. Reputable nonprofits like Money Management International offer confidential services to help you better manage credit and debt.

You’ll get a complete credit review, customized counseling sessions, and tools to improve financial habits. Ongoing support can help you continue strengthening your credit after debt settlement.

Don’t Take on New Debt

It may be tempting to open new credit accounts to rebuild your score faster. But adding debt right after debt settlement defeats the purpose. And it could send you into another debt spiral.

Let your credit naturally improve over time. Live within your means and only make purchases you can truly afford. More debt will undo all the progress you’ve made.

Review Your Budget

Now is a good time to review your monthly budget and make any necessary adjustments. Look for areas where you can cut back on spending to avoid racking up new debt. Make savings a priority, even if you can only start with small amounts.

A budget will help you track income and expenses. Be sure to account for essential needs like housing, food, utilities, transportation, and insurance. Avoid discretionary spending on wants until your finances stabilize.

Build Up Your Emergency Fund

Having an emergency fund is crucial to avoid going back into debt when unexpected expenses come up. Try to build up 3-6 months’ worth of living expenses in a savings account.

Contribute any extra money at the end of each month. Even small amounts add up. An emergency fund prevents you from having to rely on credit when something unexpected happens.

Contribute to Retirement Savings

Retirement may seem far away, but time is your best ally when saving for later years. Contribute to a 401(k) or IRA if your budget allows. Take full advantage of any employer match if available.

Automate contributions so they come directly out of your paycheck. Start small if needed and try to increase the amount annually. Consistent saving over time is key for retirement funds to grow.

Find Ways to Increase Income

Bringing in more income each month provides more money you can put toward savings goals and discretionary spending. Consider asking for a raise, finding a higher paying job, freelancing, or monetizing a hobby.

Even an extra $100-200 per month makes a difference. The more you can increase earnings, the faster you can rebuild finances and avoid debt dependence.

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