improving your credit

Q. I am paying debt settlements on my credit cards from several years ago. I fell behind because of unemployment. We do not use credit cards now. We pay all of our bills with a debit card. It feels great to pay directly and on time. Plus, we are not accumulating any more debt. How long does a debt settlement stay on a credit report? I have heard that it's seven years. Also, does this mean we will never be able to get loans or credit at reasonable rates? How will debt settlement affect our ability to finance a car or obtain student loans?

A. In most cases, negative items are removed from your credit report seven years after the first date of delinquency. In your case, think back to the date you first fell permanently delinquent on the debt that got charged off. This is the start date of your seven years. (A bankruptcy may remain on your credit report for 10 years, however.)

You mention the accounts you are settling are already several years old, so you won't have to wait seven more years for their removal. From your letter, I'm estimating it will be more like four years or so.

As far as future credit, paying the past due accounts in full would be best. But paying an agreed-upon settlement amount is better than paying nothing.

Here's a hypothetical illustration of how lenders will feel about you. Let's say you have a cousin who borrowed $1,000 from another relative. You happen to know that the relative was repaid only $500, and the cousin long ago missed the repayment deadline. Now the cousin is asking you for a $1,000 loan. What would you do?

Your priority should be to add positive information to your credit report once you have completed settling all your accounts. Here are some thoughts on how to do that.

You say you are strictly using your debit card for purchases and bill paying. I understand your pride in paying cash, and appreciate your determination not to get into credit card trouble again. But debit card purchases are not reported to the credit bureaus. So this record of on-time payments doesn't make it to your credit report.

If you don't have any revolving or installment accounts — other than a mortgage — consider opening one of each. You can get the positive reporting on your credit report with a secured credit card. Secured cards are issued with a low credit limit, based on the amount of money you have deposited in a savings account with the bank issuing your card. A low limit will help you refrain from overspending.

Shop around for a secured card with no annual fee that reports to the credit bureaus. Likewise, you can open a passbook savings account and take out a passbook installment loan from a lender that reports to the bureaus. That will also get some positive reporting for your credit score.

The key to improving your credit is to make on-time payments as agreed, on the credit card and the loan. The more time that elapses from your old credit troubles and the more positive information you add to your credit report, the more likely you are to receive affordable rates and terms for new loans in the future.