Debt Consolidation and Your Credit Score
October 9th, 2007
Your credit score is a computer generated number ranging from 300 to 850 based on the contents of your credit history reports. This score is a numerical representation of your risk to potential lenders. If you are considering a debt consolidation loan your credit score is an important factor of loan approval and determines how much you will pay that lender in finance charges. Here are the basics you need to know as a consumer about your credit score.
National Credit Agencies
There are three credit agencies responsible for maintaining credit records in the United States. These agencies are Equifax, Experian, and Trans Union. Each company has its own method of calculating your credit score which is why you’ll have three different scores associated with your credit reports. Credit bureaus record payment information from your creditors including balances, limits, and when your payments are made on time or late.
Not all of your creditors report to these agencies as it costs a company money to access your credit report. Utility companies for example typically do not report to the credit agencies unless your account has been sent to a collection agency. Your car payments, mortgage, credit cards, and personal loans all report directly to the credit reporting agencies.
Your Credit Score And Debt Consolidation Loans
Your credit score is the first thing lenders look at when reviewing your application. Because you’re taking out a loan to consolidate your bills you have to first qualify for the loan and your lender considers your credit score and income when evaluating your ability to repay. Lenders like to see established accounts on your credit reports. Accounts that you have had open for a month or two prior to applying for debt consolidation will not help your credit, but will could against your debt to income ratio.
How is Your Credit Score Determined?
All three credit bureaus have their own method of calculating your credit score and are not legally required to disclose these methods. While the mechanics of calculating your credit score are kept under wraps by these credit agencies we do know what factors from your credit reports are used to determine your score. If you visit Equifax’s website for instance you’ll see that 35% of your score is based on your history of making payments on time. Pay all of your bills on time and your credit score will go up.
The amount of debt you have and the types of credit you use also affect your score. If you have a credit card with a limit of $3,000 and have maxed out the card your credit score will be lower than if you had an available balance. It is extremely important to review your credit reports and make sure the limits on your cards have been accurately reported. Suppose you have a $1,000 balance on a credit card that has not reported your limit. This credit card is actually damaging your credit score because the credit agency will consider your limit to be $1,000 and maxed out which will lower your score. If you find your credit card limits are not accurately reported call these companies and ask them to correct the discrepancy because they are damaging your credit score by not reporting accurately.
The different types of credit you have are weighed differently when determining your credit score. Your mortgage for example is weighed more heavily than your credit cards. If you’re making your mortgage payments on time this demonstrates that you’re a reliable borrower and will be reflected in your credit score. Installment loans like your car or a signature loan from a bank are next on the list. Your credit cards have the least amount of favorable impact on your credit scores. If you make late payments to your credit cards this will damage your score; however, positive information from credit card companies will not sway your credit score as much as your mortgage will.
Another thing you should be concerned with dinging your credit score is the number of people making inquires into your credit. The more companies you have requesting your credit actually lowers your score as it appears you are trying to access more credit.
What Should You Do if You Find Mistakes on Your Credit Reports?
The credit reporting agencies are far from perfect and finding errors are a common occurrence. The problems arise because there are literally so many hands in your credit reports that many of the companies you deal with are reporting inaccurate information due to errors or general laziness. This is why it is very important that you frequently check your credit reports for errors. You can do this for free by visiting the website AnnualCreditReport.com and downloading your credit report from each reporting agency. Congress recently passed a law requiring the three reporting agencies to allow you free access to your credit report once per year; this website was established to comply with the law.
If you find mistakes on your credit report you will need to dispute the error with the reporting agency and the creditor responsible. Every credit agency has a procedure in place for settling disputes.
Tags: credit report, credit score, debt consolidation loans
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