If you have a debt settlement on your credit record, it may take your credit score awhile to recover. For several reasons your credit score will suffer as a result of settling a debt (or multiple debts) with your creditors. You should develop a solid recovery plan to repair your credit.
Stop Payments
Creditors typically will not consider negotiating a debt settlement until you are about six months behind on your bill payments. They have no reason to settle with someone who is making regular payments. If you fall behind on your payments, your credit score will suffer, because your payment history accounts for 35 percent of your FICO credit score. So before the settlement, your score has already been damaged.
Settling
When you settle your debt, a note is attached to your report that indicates you settled your debt for less than the original balance. It may be indicated in several ways -- such as "settled" or "settled for less than full balance" -- but the meaning is still the same: You did not pay off your entire debt. Having debt forgiven is a negative item on your report, thus reducing your credit score. If you can persuade your creditor to report your settlement as "paid," you may see an increase in your credit score. Creditors may not be willing to report a settlement this way, however.
Road to Repair
After you have settled your debt, use all possible measures to build your credit score back up to a respectable level. Do not miss payments and reduce your debt-to-credit ratio -- the amount of debt you carry relative to your credit limit. Achieving a debt-to-credit ratio of 30 percent or less should be your goal, according to MSN Money. Payment history and the amount of debt you owe combine to make up 65 percent of your credit score. Keep these two sections healthy and your score will improve.
Other Tips
To further ensure that your score is healthy, request a copy of your credit report from the three major credit reporting agencies -- Experian, TransUnion and Equifax. You can obtain a free copy of your credit report from each agency once each year through AnnualCreditReport.com. Review your report to ensure there are no errors. Any mistakes can hurt your score. If you detect an error, file a dispute with the credit reporting agency by mail or online through the credit agency's website. The credit agency is required to investigate the claim.
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