What you can do about your credit score
If you wonder whether or not debt consolidation will help or hurt it your
credit score. The answer is.....maybe. I know that's not much help, so please read on. Your credit score is actually based on several factors.
It's how you manage credit that determines your score. Simply put, your credit scores is based on your credit report. In order to make improvements to your credit score, you need to check for and eliminate any errors. Also, it's important to look at the age of each report, included within your report. You don't have to live with reports more than 7 years old, unless you had a bankruptcy. I suggest to people that I counsel, that they make every attempt to eliminate any negative information on their report that's from before March 1999. Just get these negative reports removed. This is especially important for late payment reports. At some time in our lives, especially if you move or travel a lot, like me, a late payment occurs. Unfortunately, these late payments will lower your credit score. So, if they're old, get them off your report.
If you have had debt relief, as opposed to debt consolidation, in the past,
make sure that your report is no longer flagged. This will keep you from getting
credit. Take the time to go through and repair your credit report at least once
a year. You would be surprised what may show up on your report. I
once had a doctor's bill that had been paid late. Although I had moved my
family 2,000 miles from Los Angeles, my mail was very slow to catch up to me.
The doctor's office reported my late pay and I didn't find out about it until 3
years later, when I applied to refinance my home. Although I had paid my
bill in full, my report still showed this negative. Eventually the
doctor's office removed the complaint and my good credit was restored.
Once you've confirmed that your credit report is accurate (or at least in
your favor), you need to look at the three main factors that make up your score:
Payment History (35%), Amount of Free Credit (30%) and Length of Credit History
(10%). The last factor, length of credit history is a function of time. Like
wine, it gets better with aging. The other two factors, you can control and
improve. Your Payment History is the single most important thing on your credit
report. Payment History is simply a record of whether you were late on any
payments. Although you can't do anything about a previously missed payment, you
can change the future. The last year of making payments carries the most weight
for your Payment History score. This last year is particularly important
if you are seeking a debt consolidation loan.
How to improve your payment history with debt consolidation
The first step is to get online bill payment. If you set-up your checking
accounts to pay your bills at least three days before they are due, you won't
ever be late. By reducing the number of payments that you have to make, debt
consolidation with online bill pay can dramatically help your credit score. By
making your debt consolidation loan payments on time, you demonstrate a good
payment history, which will improve your credit score. Since the number of
creditors is reduced, debt consolidation also reduces the risk of an error on
your credit report. The next part is perhaps the only component you have
immediate control over. The amount of free credit you have access to. Creditors
desire that you use no more than 30% of your available credit.
If you are
seeking a debt consolidation loan to improve your credit, you will need to keep
this percentage in mind. A strategy you can use is to get a debt
consolidation line of credit for more than the 30% of available credit and then
pay off your credit card debt with the debt consolidation loan. Ensure you
leave the credit card accounts open, but shred the cards. Technically now you
have available credit. Although this isn't as good as having 10% on each
card, it's more affordable. I caution those who use this strategy that it only
works if they don't go out and use their credit cards. Debt consolidation is not
a silver bullet for your credit score, but it can be used to show that you can
use more credit responsibly. Which will improve your credit score. I
counsel people that, if used correctly, debt consolidation can be a tool to
improve their credit score. However, just like you can't build a house with only
a hammer, debt consolidation must be used with sound financial management
practices to build up your credit score.
Dan Lyne is a writer for lessen-your-debt.com. For additional articles about
personal finances and an extensive resource for everything about debt consolidation
and discount auto insurance click on the links.
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