Debt Consolidation Vs. Debt Management  For Better Credit Rating

A debt consolidation plan, to improve credit rating, consists of taking out a new all inclusive loan to pay off several existing loans in order to make payments more feasible. An example would be taking out a second home mortgage or a home equity line to pay off say an existing mortgage, a vehicle loan and a student loan. However, you must remember that the debt consolidation plan does not reduce your initial balance, it just consolidates it.

A debt management plan is usually devised by debt management services who negotiate the loan terms with your creditors and attempt to reduce your interest rates and payments. However, if you apply for a new credit line later, you might have some trouble. In most cases, using a debt management plan is treated the same as filing for chapter 13 bankruptcy. Creditors become wary of lending more money to you as they perceive you to be overburdened already. While the debt management plan might help you lower your debt, it comes at a price.

Debt Consolidation Loan To Improve FICO Credit Rating

A debt consolidation loan does nothing to harm or improve your FICO credit rating in the short run as the credit agencies look at your entire credit line as a whole which remains unaffected.  However, if you make payments on this new loan consistently then eventually the debt consolidation plan will help you improve your credit rating. Besides improving your FICO credit rating score, a debt consolidation loan reduces the number of payments you need to make and groups them into one single payment. Thus it becomes easier to keep track of and make the payments on time.

Debt Management Without Debt Consolidation Loan

Debt management is possible without having to apply for a debt consolidation loan. In such a case, a debt settlement might be reached with the creditors in order to decrease your debt. It may reduce your Interest rates, minimum monthly payments and future late fees. In some cases this leads to a major setback to your credit rating score but unlike a debt consolidation plan or loan, you do not take on further debt to do so. It eventually helps you to pay off your debt much faster and pay lesser than you owe currently.

Improve Credit Rating Score With Debt Settlement

A debt settlement or debt consolidation plan can be beneficial to one in many ways in order to improve your FICO credit rating score. The main aim of these service providers is to help you lead a debt free life eventually. A Debt settlement/Debt consolidation plan could help you rebuild your credit rating score by:

• Decreasing interest rates drastically for the balance owed
• Eliminating future late fees
• Creating one easy payment making it easier to keep track of
• Paying off your debt faster.

Even though Debt Consolidation/Debt Management  plans come with their pros and cons, if chosen correctly they might prove beneficial to you to become debt free and eventually improve your credit rating and create a good credit report.

What is Your Fico Score Chart Made Up Of?

Primarily your Fico credit score is dependent on the following factors:

• Length of Credit History – This usually contains data like the time since the account has been active and classifies them based on account type (e.g. consumer credit contract, hire purchase, residential mortgage etc). It also contains data regarding the last time there was activity on the account. This usually accounts for about 15% of your personal credit rating.
• Repayments history – This is the most important part of your FICO score chart as this accounts for 35% of a good credit rating. The data contained in this relates to repayment information classed according to account type. It also displays the presence of any adverse public records e.g. bankruptcies, court judgments, writs etc and also amounts due on accounts in arrears and the time since these amounts were due. This section of your FICO credit score also shows delinquent accounts which have been paid as agreed.
• New credit contracts entered into – This accounts for only 10% of your personal credit rating and contains information such as new credit enquiries classed on the basis of type of account. It also shows the time since the last credit enquiry was made and if good credit history has been reestablished since the last time the account encountered problems.
• Balances owed on each credit contract – As it would suggest this part of your fico score chart deals singularly with balances outstanding on credit contracts classed on the basis of account type. This also displays the proportion of balances owed to the total credit limit available with regard to revolving credit contracts (e.g. Lines of Credit). This accounts for about 30% of your score
• Types of credit- This displays the types of credit used by the consumer e.g. retail accounts, mortgages, credit cards etc. This accounts for another 10% of your Fico credit score.

Your FICO score chart takes into consideration all the factors mentioned above and FICO scores consider not only the negative factors but also the positives.  In addition it would help to know that while banks and finance institutions may consider a lot of outside factors while making decisions, your FICO score only considers the information available on your personal credit rating.

How To Improve Credit Ratings?

Good Fico credit scores are important and if you would like to restore your credit score it is important that you know how to improve credit rating.

• Your repayment history is extremely important and it is essential that you ensure that you keep on top of your repayments for a good credit rating. If you have missed any repayments in the recent past catch up with them.
• Remember that accounts which have been in collections, even after being paid still remain on your personal credit rating for a period of 7 years. Hence paying them off will not make them disappear immediately.
• If you feel like you are going to struggle with your finance obligations, then it may be time to see your bank or financial institution. Talk to them and seek independent financial advice about the best way to resolve your financial stress without letting it adversely affect a good credit rating.
• Having a brand new credit card is tempting but do not accept credit unless needed . This not only creates unwanted credit but also hampers your personal credit rating as it causes an additional enquiry and adds to your list of balances owed/ credit limit available.
• If you have not had a credit file for very long, just to show enquiries on your credit report, do not open up a lot of credit enquiries on your account at the same time. This reflects badly on your Fico credit score as this will show too many enquiries in too short a time.
• If you have had a bad personal credit ratings history, to restore credit scores only get the credit that you need and start paying them off in a timely manner. This will improve your FICO personal credit rating in the long run.
• Check your credit report as often you think fit to check whether you have a good credit rating. Ordering your own credit report does not affect your personal credit rating in any way.

Knowing how to improve credit ratings is not hard. By following these simple steps and managing your credit better you can vastly improve your Fico credit score and achieve a good personal credit rating.