The decision to pay off debts is a first positive step toward reestablishing credit. Many people wonder how long it takes to get a decent credit score back after settling debts. Although there is no one-size-fits-all answer to this, here are some factors to consider that will give you a better idea of what to expect with your individual situation.
Type Of Debt Payoff
If you obtain a debt consolidation loan to pay off debts, you can pay them immediately. This puts you on a quicker track to restoring your credit. Settling debts yourself by contacting creditors and negotiating a fractional payment is a tough process but can be done. If you choose this route, it means a slower recovery unless you have the money to pay all debts at once.
Many people hire debt settlement companies and mistakenly think that they work the same way as a consolidation loan. The settlement company collects payment from you until your balance builds enough funds to pay a debt. They may pay one creditor at a time or make monthly payments to them, which lengthens the payoff time.
Length Of Reporting Time
For most debts, credit reporting agencies are allowed to report negative but accurate items for seven years from the date of the first late report. If you choose to pay off collections, they will still appear as negative items. However, there are ways to build your credit score even with these items remaining. Keep in mind that no company can “fix” your credit or remove accurate negative items. Only inaccuracies can be removed. If you find inaccuracies, have them removed to build your score.
How To Build Your Credit Faster After Paying Off Debt
The key to rebuilding your credit score is establishing a history of on-time payments and positive accounts. If you can pay all of your bills on time for 12 months, you will see your score improve if you do not incur any additional negative items. Make sure that your open accounts are not all the same type of credit. For example, it is better to have a traditional loan account, and auto loan and two credit cards than just five open credit card accounts.
Also, compare your available credit to your used credit. If you carry high balances on your credit cards that are close to the limit, this can affect your score negatively. Ask the credit card company for an increase or pay down balances. If you are struggling with interest rates, apply for a no-interest card to do a balance transfer. However, you should not submit too many credit applications. Since multiple inquiries lower your score, ensure that creditors are not checking it routinely.
Another important consideration is the total length of your credit history. If you are new to building and using credit or started your history with negative items, it could take several years to build your score. Check with your credit card company or companies to see if they offer a free score monitoring program. If they do, use it. Also, you can sign up for Credit Karma, which is a free service for monitoring your score. It also suggests ways to improve and protect your credit.
If your debts are not already in collections, contact the creditor immediately to discuss a financial hardship program or a reduced payment option. Most creditors will work with you to help you protect your credit and to get their money. They only get a fraction of your outstanding debt amount if they sell it to a collection agency.