Can You Get a Credit Card After Debt Settlement?

Graduating from a debt settlement program is a reason to celebrate. It feels good to end your debt stress, get rid of your debts, and move on with your financial life. It’s true that debt settlement, like some other solutions for serious debt problems, could negatively impact your credit score. As debt relief helps you move forward, you might wonder about getting a credit card after debt settlement. 

Can you get a credit card after debt settlement?

Yes. You might have a more limited range of credit card choices after debt settlement, but you can still get credit cards. Banks offer a few types of credit cards designed to help people rebuild their credit scores while enjoying the convenience of paying with credit cards.  

How Does Debt Settlement Affect Your Credit Score?

Your credit score may drop during debt settlement. There are two reasons.

The greatest damage comes from missing payments. Most people stop making debt payments while they negotiate with creditors. There are many reasons for this, including that you simply can’t afford to make your full debt payments, or that you’re setting aside money for potential settlement offers.

The second factor is that if you close out a debt for less than the full amount you owe, it shows up as “settled” on your credit report. A settled account is better than a collection account but not as favorable as “paid as agreed.” 

Before you can qualify for a traditional credit card again, you need to rebuild your credit standing. A history of on-time payments and responsible money management could help improve your credit standing and get you back to using traditional credit cards. 

If you’ve already fallen behind by the time you start settling debts, the debt settlement process may not have a significant effect on your credit standing. If you have a higher credit score and you start missing payments, you could experience more serious damage to your credit standing.

Settling your debts could put you on stronger financial footing, and that could help you keep up with your bills and avoid needing debt relief in the future. Paying your bills on time and keeping credit card balances low puts you in the best position to build and maintain a strong credit standing. 

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What Credit Score Do You Need To Get A Credit Card After Debt Settlement?

Credit card companies establish guidelines for every card they offer, and minimum credit score requirements vary. You won’t qualify for most mainstream credit cards following debt settlement. 

However, there are credit card companies offering second-chance or credit-building cards to people like you—consumers with low credit scores (or even no credit score) who are ready to successfully manage a new account.

How To Build Credit With A Secured Credit Card

If you have damaged credit, a good way to start rebuilding is with a secured credit card. These require a cash deposit, but are easier to qualify for than traditional cards. Consistent use of a secured credit card with on-time payments can help improve your credit score. This could make you eligible for unsecured credit cards with better terms.

Why do you need a special kind of credit card after debt settlement? Because chances are, your credit was damaged as you settled your debts. If you fell behind on your bills, there may be negative events on your credit reports, such as late payments or delinquent accounts. It can be harder to qualify for new credit accounts when you have negative information on your credit reports.

Most credit cards marketed as “second chance” or “credit-building” cards are secured credit cards. These credit cards require you to put up a security deposit. Often, your credit limit will be equal to the amount of your security deposit. Some secured credit cards have hefty fees, but others are free to own and use. Shop carefully. Expect all secured cards to have a high APR. You don’t have to worry about the APR if you pay your bill in full each month. 

The card issuer won’t touch your deposit unless you don’t pay your account as agreed. You can use a secured credit card just like you would a traditional card, and you make payments every month. If you don’t make on-time payments or pay your monthly secured credit card bill in full, you’ll owe fees and interest, just like with a regular credit card. 

Secured credit cards have a few nice perks. Some offer credit card reward points or cash back. Secured cards can be used for online purchases or mobile wallets. And secured cards don’t look any different from other credit cards, so no one can tell when you use them that they’re secured. You can shop with confidence, and you don’t have to feel bad about having a secured credit card. Using this card means you’re being smart about your credit and taking positive steps forward to build your financial future.  

Making small purchases with the card and paying your balance off every month could help you build credit. When shopping for a secured credit card, make sure it reports your payments to all major credit bureaus to improve your credit scores. 

One good strategy for starting your new life with a credit card after debt settlement is to focus on managing a secured credit card successfully for six to 12 months. In just a few months, your credit situation can change for the better. Your card issuer might increase your credit line without requiring more cash deposits. Some credit card issuers automatically review your account after six to 12 months, and let you transition to an unsecured credit card. Or you can apply for an unsecured card yourself and close the secured account to get your deposit back.

Why Maintaining Low Credit Utilization Matters After Debt Settlement

Credit utilization is the second-most important factor in your credit score. Only payment history is more important. 

Credit utilization is the percentage of your available credit that you're currently using. Suppose you have a card with a credit limit of $1,000, and you owe a balance of $250. That means you’re using 25% of your available credit. 

Generally speaking, the lower your credit utilization, the better. People with exceptional credit scores generally have credit utilization rates under 10%. 

So, to recover after debt settlement faster, use credit very lightly. Pay on time, and pay off your full balance whenever possible. 

How Should You Use A Credit Card After Debt Settlement?

Credit cards are for convenience. Get something now and pay for it when you receive the bill.  Don’t use your secured card to pay for things you can’t otherwise afford. You’re using it to build a good credit score and eventually qualify for other types of credit, like auto loans, prime credit cards, personal loans, and mortgages. So don’t think of a secured credit card as free money. It’s a tool to build credit and a better financial future. 

Make the most of your credit card after debt settlement by using it for small purchases, and pay off your balance every month. Payment history influences your credit scores more than anything else. Some other tips to get the best results from your credit card after debt settlement include:

• Don’t use too much of your available credit. Utilization is the second biggest factor affecting your credit score. People with good credit typically have low utilization—they use a small part of the credit that is offered to them by lenders. Use your card sparingly, and never max it out.

• Don’t take on new credit if you’re struggling to pay off your current balances. Avoid carrying balances (and paying interest) whenever possible.

• Check your credit reports regularly to make sure the data is accurate, and that you’re not a victim of identity theft. You can get a free copy of your credit report every week from each of the three credit reporting companies via the website AnnualCreditReport.com. 

• Apply for credit cards sparingly. As your credit score grows after debt settlement, creditors will probably contact you with offers for their cards. Don’t rush to apply for new credit cards. Every time you accept an offer and apply for a credit card or other loan, you generate a hard credit inquiry. Hard inquiries each have the potential to temporarily drop your credit score by a few points. Every point counts when you’re rebuilding your credit. 

• Sign up for automatic payments on your card to avoid missing payments. You can also sign up for automatic reminders of payment due dates. Give yourself fewer steps to complete and fewer items on your to-do list so you’re more likely to be consistently successful in managing your credit card after debt settlement. 

• Avoid unnecessary fees or high interest rates. You can keep costs low by understanding your card agreement, paying on time, never taking cash advances, and paying off your balance as fast as possible. Fees and high interest charges are a big reason many people end up needing credit card debt relief, so be careful to avoid these costs as you move forward with your fresh start in life. 

Watching your budget, being mindful with your spending, and building healthy, responsible money management habits helps your credit recover after debt settlement. Sometimes the best credit card after debt settlement is a secured card with a manageable spending limit based on a small cash deposit. In a relatively short time, you might be able to build up a positive credit history that could help you qualify for better credit terms in the future.