If you suffer from a low credit score due to late or skipped loan payments, consider a debt consolidation loan now.
Credit Score Factors
Many things go into determining an individual’s credit score. They include total amount of debt, amount of debt on each credit card or revolving loan relative to credit limit on that card or loan and probably most important, the history of payment on each debt listed. Payment history refers to timely payments. Each time a payment is late or missed, the credit score drops. Any time the amount of debt on a credit card or loan is more than half of the credit limit, the credit score drops. In other words, if one has a credit limit of $5000.00 on a credit card and the amount charged is over $2500.00, the credit score will drop. Once the debt goes below $2500.00 the credit score can rise between 20-40 points. Late and/or missed payments hurt a credit score more than anything else and if a debtor finds himself in this position, he may want to consider debt consolidation.
What is Debt Consolidation?
A debt consolidation loan is a loan in which it is used to pay off much or all of existing credit card or revolving loan debt. The new payment on the consolidation loan is less than the combination of the loans being paid off. In this way, the debtor is able to lower his monthly debt obligation and simplify his overall debt payment by having only one payment to make. Debt consolidation makes sense for individuals who are having difficulty making all of their loan payments on time and who need relief in order to get back “on track.”
Using Debt Consolidation to Improve Credit Score
Obviously, if a debtor is skipping payments or making late payments, his credit score will consistently decline. Each late payment each month adds to this decline, and the damage to a credit score may take years to repair and then only if the debtor is able somehow to reverse the trend of late or skipped payments. A debt consolidation loan will pay off these “bad” loans, creating a zero balance, and the debt will be reported as “paid”. If a negotiated settlement was reached for a lower amount to be paid, that will be reflected on the credit report as well and will hurt the score in the short-term. However, if an individual gets the “bad” loans paid off and the accounts closed, and are then able to make timely payments on the debt consolidation loan for the next 12-month period, the credit score will gradually improve over those 12 months.
The other key factor in selection of a consolidation loan is to maintain conservative and responsible credit behavior from that point forward. Many choose to retain one credit card for emergencies, and this is a sound plan if self-discipline can be maintained. No additional credit should be obtained until the consolidation loan is paid in full as agreed. At that time, it is wise to obtain an additional credit card, but to proceed with caution, charging only a small amount each month and paying off the entire balance. This behavior for about a 6-month period will also result in a significant credit score spike.
Ideal Credit Score
Credit scores range from a low of about 400 to a high of 850. In the current “credit crunch” market, lenders are not apt to be kind to individuals whose credit scores fall below 620. Particularly in the mortgage market, a loan is almost impossible below this figure. As well, lenders for cars, appliances, etc., will charge a much higher interest rate to individuals with lower credit scores. Credit card companies also have a variety of interest rates dependent upon credit score, the best going to those with the highest scores. It therefore makes sense to do whatever is necessary to keep that credit score as high as possible.