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. |
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