Ways to settle your debt and reduce your burden

If you're facing financial hardship and it's getting difficult for you to pay your bills, try to settle your debts. A settlement is an agreement between you and your creditor/collection agency (CA) where the creditor agrees to reduce your outstanding debts, making it easier for you to repay your bills. If you want to get an idea about the ways to settle your debt and improve your credit, glance through the topics given below:

How to settle and clear your debt

When you're having problem making your bill payments, you should contact your creditors and explain your financial condition in detail. Send them letters and tell them why you can't pay, along with an alternative plan you've thought of to repay your bills. If you've lost your job or you're going through a family crisis, you may not be able to make the payments in full. In this case, you need to settle your debts for less than the outstanding balance on your accounts.

You can settle your dues in 2 ways:

1. Professional settlement services:

There are many debt relief companies that can help you negotiate a deal with your creditor or collection agency. These companies negotiate with creditors and collection agencies to get your unpaid balance reduced. All you have to do is enroll in settlement program and pay a small fee.

2. Do it yourself plan:

This is where you negotiate with creditors or collection agencies to have your outstanding balance reduced. To learn how to negotiate and settle your debts with the creditor or CA on your own, check out this article: ""How to settle your debts yourself".

How settlement affects your credit score

When you stop making monthly payments in order to save for a settlement, your creditors or collection agencies will report the missed payments to the credit bureaus. This means your credit score will go down.

After you've settled your debts for less than what you owe, your creditors will report your payments to the credit bureaus. They will update your account status to "Paid" or "Settled".

To make your credit score go up, you need to negotiate for a Pay for delete agreement with the creditor or collection agency. This gets the account deleted from your credit report once you settle and pay it off. If you don't get a Pay for delete agreement, then you'll have to repair your credit on your own after a settlement.

How to repair your credit after settlement

Here's a list of 5 things you can do in order to repair credit after you settle your debts:

Secured credit card:

Secured credit cards easily available by those with a poor credit history. The purpose of such cards is to help you rebuild your credit. Learn how secured cards work.

Gas/Store cards:

These are credit cards offered by department stores and are easy to qualify for. Once you get a store cards, use them every month and pay more than the minimum payment. Do not use more than 50% of the credit line at any time. Once you show a positive credit history with your store card, you can apply for a commercial credit card.

Savings account:

Open a savings account and deposit money into it every month. Take out a small loan with the savings account as your collateral to get a secured credit card. Once you have enough savings, you can pay for unexpected expenses without having to use a credit card.

On-time payments:

Pay your utility bills and rent/mortgage payments on time.

Avoid unnecessary credit:

Do not take out unnecessary credit and raise your debt to income ratio. Make sure you avoid taking out payday loans right after settlement, because in case you fail to pay it off, it'll hurt your credit even more and you'll end up in debt again.

A settlement agreement helps you to get rid of debts and pay as much as you can.

Last Updated on: Wed, 11 Apr 2018