How long does it take to clean up poor credit ratings?

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Dear Debt Adviser,I had a very tough situation in the past three years that put me in too much credit-card debt. Eventually, all my debts ended up in collections.Recently, I got a good break and was able to negotiate and settle all my debts. How do these settlements impact my credit score and standing? How long will it take before my score improves? Will I be able to rise and enjoy the benefits of having good or fair credit, despite my history? -- CherylDear Cheryl,The term "settlement" refers to getting a creditor to agree to accept less than the full amount owed in exchange for a fast lump-sum payment. Typically, the account in question is significantly delinquent and the creditor believes collecting the debt is doubtful.From a lender's point of view, a settlement is like getting punched in the nose instead of being shot. The lender knows it could have been worse, but don't expect a "thank you" for it.It appears that you have stopped the deterioration of your credit history and score, but at a high cost. Yes, you could have done more damage with continuing delinquencies or a bankruptcy. But settling is not a positive in the credit world.Payment history is 35 percent of your FICO score and 32 percent of your VantageScore. Chances are your credit got worse as you became more delinquent over the past three years. Your file has negative entries that will remain on your credit report for the next seven years.Until you can re-establish your credibility by making a number of payments (six months to a year, all things being equal) on time and as agreed, lenders will have room to doubt whether you are a good credit risk. They sure won't want to lend you $1,000 if they think they might only get $500 back.I'm glad your tough times are behind you. From this point forward, your credit should improve, as long as you make your payments on schedule. Soon, you will enjoy the benefits of good credit again.However, your recent settlement calls into question your ability or willingness to pay debts. As a result, you must make as few missteps as possible going forward.Make doubly sure you pay the correct amount on time each month for accounts with open balances, such as your mortgage, car loan, retail credit accounts, etc.I strongly suggest putting a spending plan in place and saving for emergencies so you don't end up in credit-card debt again.Two last thoughts: If you settled the accounts yourself, hold on to your documentation showing that the lender agreed to the settlements as final payment on those accounts. This is important in case collectors show in up a year or two looking for the rest of the money. If you used a settlement company, contact your creditors to be certain that the debt was indeed settled and paid.Lastly, be on the lookout for Internal Revenue Service 1099 forms from these settlements. Depending on how much of a loss the lenders took (usually more than $600), the IRS may count the settled amounts as discharge of indebtedness income and want you to pay taxes on the difference between what you owed and paid.(Steve Bucci is president of Money Management International Financial Education Foundation. Visit www.moneymanagement.org for additional debt advice. If you have a question for Steve, e-mail debtadviser(at)bankrate.com. The Debt Adviser is a weekly feature of bankrate.com. For more stories, visit scrippsnews.com.)