Using a High Credit Score to Consolidate Debt Cheaply
When it comes to personal finance, there may not be a more important number than one's credit score. Although it is was originally designed to determine a person's suitability for getting a car loan or a mortgage, its use has expanded considerably over the years. Today credit scores are now being checked for people looking to rent an apartment and even by employers for people applying for a new job. It is becoming increasingly clear that a good credit score is essential to financial survival in the modern world, even for people who are not looking to get a loan.
Of course, if a person does need a credit card consolidation loan because of high credit card debt, a good credit score is essential to getting the best interest rate on the loan. Otherwise that person runs the very real risk of getting even worse terms on the consolidation loan than on the credit cards debts they are consolidating. Instead of making their credit problems better, they end up just exacerbating them.
As such, it is important for anyone considering a credit card consolidation loan to understand the basics of a credit score, especially in regards to how it is calculated. The problem is complicated by the fact that there are actually three separate credit scores, one for each of the three credit reporting agencies to calculate such scores. Because even one bad credit score out of three can damage a person's ability to get a good interest rate on a loan, anyone concerned with their finances should follow all three of their credit scores.
Although the three credit agencies have their own formulas for determining a credit score, all of them incorporate roughly the same kinds of information.
Some of that information, in relative order of importance, is listed below.
Past Payment History
Credit Utilization Ratio
The Length of a Person's Credit History
The Number of Credit Accounts Available
New Credit Requests
The first two items on the list are by far the most important, accounting for roughly two-thirds of the entire credit score. Past payment history accounts for the ability of a person to make prior interest payments in a timely manner. Missing just one payment by a month can lower a credit score by 100 points or more; as such it is very important to not miss a credit card or mortgage payment.
The credit utilization ratio is basically just the amount of credit that is used relative to the amount of credit is available. For instance, for a person with just one credit card who has a $1,000 balance on that credit card, which has a $10,000 limit, that person's credit utilization ratio is 10 percent. As a general rule, credit rating agencies prefer a lower utilization ratio to a higher one. People who are constantly using all of their available credit may be at a greater risk of getting into financial troubles.
Credit scores have a scale from 300 to 850; anyone with a score of 720 or above can generally receive the most favorable interest rates on loans. Therefore, before anyone does their research on debt consolidation, they should make sure that their credit score is near that number.
Unfortunately, this may not be an option for people who have already fallen behind on their payments. If that is the case, a higher interest rate on the consolidation loan may be inevitable unless the loan is secured by a home or other asset. However, if a person's credit rating is still in good standing despite the debt problems, keeping that great credit score should be the highest priority as it can save that person thousands of dollars in interest charges through a low-cost debt consolidation loan.