Can You Get a Credit Card After Debt Settlement?
- UpdatedDec 24, 2024
- Key Takeaways:
- A secured credit card is the easiest type of credit card to get after debt settlement.
- Keeping credit card balances low and paying on time will help raise your credit score.
- Many credit card issuers offer second chance cards and credit building cards.
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Graduating from a debt settlement program is reason to celebrate. Bake a cake, invite some friends over and be proud of your accomplishment. Or at least pat yourself on the back. Now is the time to put your improved financial habits to use and make good financial choices.
As you make your fresh start after a debt settlement program, a natural question is: Can you get a credit card after debt settlement?
The answer is yes, you can get a credit card after debt settlement.
Your options may be fewer, but you can do it. Chances are, your credit was damaged even before you went through debt settlement. It will take some time to build your credit score back up. In the meantime, a low credit score can hurt your chances of getting traditional credit cards.
If you have damaged credit, a good way to start rebuilding it is with a secured credit card. These require a cash deposit but are easier to qualify for than traditional cards. Responsible use of a secured credit card can help improve your credit score. This could make you eligible for unsecured credit cards with better terms.
How does debt settlement affect your credit score?
Your credit score may drop during debt settlement. There are two reasons for this.
The greatest damage comes from missing payments. Most people choose to 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 the purpose of making settlement offers.
Then, once a debt is settled, it’ll show up as “settled” on your credit report. A settled account is better than a collection account but not as favorable as “paid as agreed.”
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 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.
What credit score do you need to get a credit card?
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
Most credit cards marketed as second chance or credit building are secured credit cards. These require you to put up a security deposit to cover some or all of your credit limit. Secured credit cards can have hefty fees, so shop carefully and choose an affordable option. They’re out there.
The card issuer will only touch this deposit if you fail to pay your account as agreed. You use the card just like you would a traditional card and make payments every month. Secured credit cards don’t look any different than “regular” credit cards, and no one can tell when you use them that they are secured cards.
Making small purchases with the card and paying your balance off every month could help you build strong credit. When shopping for a secured credit card, make sure that it reports your payments to all major credit bureaus to improve your credit scores.
Manage a secured card successfully for six to 12 months. At that point, your card issuer may return your deposit and convert the account to a regular unsecured credit card. Or it might increase your credit line without requiring more money from you. Or you can apply for an unsecured card yourself and close the secured account to get your deposit back and potentially save on fees.
Why maintaining low credit utilization matters after debt settlement
Credit utilization is the second-most important factor in your credit score. It determines about 30% of your FICO 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 credit limit of $1,000 and you owe a credit card balance of $250. That means you’re using 25% of your available credit.
It helps your credit score to use some credit. Generally speaking though, 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 lightly. Pay on time, and pay off your full balance whenever possible.
How should you use a credit card after debt settlement?
Understand that you shouldn’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.
Don’t blow it! Use your new credit card for small purchases and pay off your balance every month. Payment history is the biggest factor in a FICO Score. Some other ways to best use a credit card after debt settlement include:
Don’t use too much of your available credit, called amounts owed or credit utilization. This is the second biggest factor affecting your score. People with good credit typically have low utilization. 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 for free to make sure the data is accurate and that you’re not a victim of identity theft.
Apply for credit cards sparingly. As your credit score grows, creditors will contact you with offers for their cards. Every time you accept an offer and apply, you generate a hard credit inquiry, which drops your credit score.
Sign up for automatic payments on your card to avoid missing payments or making them late. You can also sign up for automatic reminders of payment due dates.
Avoid unnecessary fees or paying 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.
These habits will help your credit recover after debt settlement. That should help you qualify for better credit terms in the future.
Debt relief by the numbers
We looked at a sample of data from Freedom Debt Relief of people seeking debt relief during November 2024. This data reveals the diversity of individuals seeking help and provides insights into some of their key characteristics.
Debt relief seekers: A quick look at credit cards and FICO scores
Credit card usage varies significantly across different age groups, reflecting diverse financial needs and habits.
In November 2024, the average FICO score for people seeking debt relief programs was 586.
Here's a snapshot by age group among debt relief seekers:
| Age group | Average FICO 9 credit score | Average Credit Utilization |
|---|---|---|
| 18-25 | 570 | 89% |
| 26-35 | 579 | 83% |
| 35-50 | 581 | 81% |
| 51-65 | 587 | 77% |
| Over 65 | 607 | 70% |
| All | 586 | 79% |
Use this data to evaluate your own credit habits, set financial goals, and ensure a balanced approach to managing credit throughout your life.
Collection accounts balances – average debt by selected states.
Collection debt is one example of consumers struggling to pay their bills. According to 2023, data from the Urban Institute, 26% of people had a debt in collection.
In November 2024, 30% of debt relief seekers had a collection balance. The average amount of open collection account debt was $3,203.
Here is a quick look at the top five states by average collection debt balance.
| State | % with collection balance | Avg. collection balance |
|---|---|---|
| District of Columbia | 23 | $4,899 |
| Montana | 24 | $4,481 |
| Kansas | 32 | $4,468 |
| Nevada | 32 | $4,328 |
| Idaho | 27 | $4,305 |
The statistics are based on all debt relief seekers with a collection account balance over $0.
If you’re facing similar challenges, remember you’re not alone. Seeking help is a good first step to managing your debt.
Tackle Financial Challenges
Don’t let debt overwhelm you. Learn more about debt relief options. They can help you tackle your financial challenges. This is true whether you have high credit card balances or many tradelines. Start your path to recovery with the first step.
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Is it a good idea to be an authorized user on a credit card?
Yes, if the account holder has excellent credit. That’s because their good payment history transfers to your credit report and can help your score. Being an authorized user technically allows you to use the credit card of a relative or friend. However, you don’t need to use it or even know the account number to reap the benefits of the account holder’s payment history.
The account holder is responsible for the card and will have to pay for any charges that you make, so don’t abuse your privilege and pay what you owe if you charge on the card.
Can you open a credit card after debt consolidation?
Yes. Debt consolidation often reduces your credit utilization and improves your credit score. However, debt consolidation can be dangerous if it tempts you to run up your balances again or take on additional debt.
If you have bad credit, you might only qualify for credit cards with high fees and interest rates. A better option may be a secured card, where a security deposit you provide is the collateral and credit limit for the card.
How long does it take to build a good credit score?
“Good” is a relative number, depending on where you’re starting from. Most lenders consider a good credit score to be 670 to 739. Above 760 is considered excellent. Establishing your credit score from scratch can take several months, and several years to build and maintain it.
You can speed up the process by opening up a credit account, keeping your balance low, and paying on time every month. Almost half of Americans have FICO scores of 740 or better, and so can you in time.
