Hey everyone! Today, we’re diving into a common question about how a debt settlement program affects your credit score over time. If you’re considering joining a debt settlement program, understanding this can help you make an informed decision.
Initial Impact on Credit Score
Initially, your credit score might drop significantly, usually by 140-200 points in the first six months. However, this depends on where your credit score is when you start. For example:
- Starting at 400s: You may not see a dip at all and might even see an increase as accounts get paid off.
- Starting around 650: The score might drop to around 500 due to new late payments and charge-offs.
First Year: Adjusting to Changes
Most people join a debt settlement program with a score between 600 and 680. During the first year, your credit score might dip because you’ve chosen to stop making full payments to your creditors. This leads to late payments and eventually charge-offs, which impact your score. By six months, your credit score might be around 480. Even if your score was higher before, you couldn’t use your credit because it was maxed out.
Steps to Rebuild:
- Ensure you have at least one credit card, like the OpenSky secured credit card.
- Consider a secured loan like Self Lender to rebuild your credit.
- Maintain a low balance on your credit card to help your credit score grow quickly.
Second Year: Signs of Improvement
By 12 months, your credit score should be between 550 and 620, even with unpaid charge-offs or collections. The reason for this improvement is that, despite the charge-offs, you are reducing your overall debt, which positively impacts your credit score. Keep in mind, the FICO 8 model is more forgiving to those who are rebuilding their credit compared to older models like FICO 2.
Key Points:
- Reducing overall debt improves credit score.
- FICO 8 is more forgiving for those rebuilding credit.
Two to Three Years: Building a Stronger Credit Profile
If you maintain low balances on your credit cards and continue to manage your debt well, by 24 months, your score should be between 580 and 650. You might even be able to purchase a home at this point. By 36 months, you might be between 600 and 680, and after four years, between 680 and 720.
Credit Mix:
- Diversify your credit by adding different types, such as installment loans or a second credit card.
- Avoid applying for too many new credit accounts at once.
Long-Term Credit Health
It’s important to note that older FICO scores might cap your credit due to past derogatory marks, but these fall off after seven years. Your credit score could be above 780 after this period.
Seven-Year Mark:
- Negative items like late payments, charge-offs, and collections start to drop off your credit report.
- Maintain good credit habits, such as making timely payments and keeping credit utilization low.
Conclusion
These estimates can vary, but they are based on years of experience. As you continue to rebuild your credit and add more positive accounts, your credit score will reflect these positive changes.
Summary of Key Points:
- Initial Drop: 140-200 points in the first six months.
- Rebuilding Credit: Use secured credit cards and loans to improve scores.
- Long-Term Improvement: Potential to reach 780+ after seven years.
- Steps to Rebuild:
- Obtain a secured credit card and loan.
- Maintain low balances.
- Diversify credit mix.
- Milestones:
- 6 months: Score around 480.
- 12 months: Score between 550-620.
- 24 months: Score between 580-650.
- 36 months: Score between 600-680.
- 48 months: Score between 680-720.
- 7 years: Score above 780 as negative items fall off.
If you want to learn more or get a free consultation, contact us at AAA Debt Solutions. We’re here to help you navigate your debt relief options and work towards a brighter financial future.
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