Debt Consolidation: How to Raise your FICO Credit Score
Understanding the Components in Calculating a FICO Credit Score
Debt consolidation—a financial method for reducing debt—consolidates your debts in one, lower monthly amount, thereby positively impacting your credit rating over time as long as the payment is consistently made. So, what is a credit score and why is it important? A credit score, also known as a FICO score, is calculated using an algorithm introduced by Fair, Isaac and Company back in 1956. This algorithm looks at four components in order to calculate your score, namely:
–How much credit you possess
–Your history with respect to paying your debt
–The kinds of credit that you are using
–The amount of new credit
Factors that can Negatively Affect your Credit Rating
You can hurt your credit rating by keeping high balances on your cards and opening several new accounts at once. In addition, if you have a substantial amount of inquiries on your report, your score will be lowered as well. Negative items on your history, such as foreclosures, bankruptcies, or judgments do not help your credit rating either.
Other Factors that Can Damage your Rating
Not only that, using secured cards and numerous revolving charges will damage your credit score too. Therefore, it’s important, especially if you obtain a debt consolidation loan, to alleviate your debt situation and understand the opportunities associated with a good credit score. By having a credit rating that is good or higher, you can obtain loans at a lower rate of interest and get credit in a faster amount of time.
Be Careful about Making Inquiries – Know when to Make Them
Also, be careful about making inquiries on your credit report as it reduces your score each time you do so. Multiple inquiries on a loan, though, as long as they are for one item, such as an auto or home, made within a two-week timeframe, or 14 days, will only count as one inquiry on your credit rating.
Keeping your Score in Check
Besides debt consolidation and making timely payments for your consolidated debt, to maximize your credit rating, you should:
–Maintain low balances on your credit cards;
–Close out any credit accounts that you don’t use regularly;
–Apply for new credit only when needed; and
–Make sure that your credit history is kept up-to-date and therefore reflects an accurate and current picture of your credit.
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