Did you know that certain credit score facts will help you choose the right debt consolidation strategy? We all know about our credit scores. We also know that we have to get it as high as we can.
But do you really understand what will make it go up? Do you know the factors that will bring your score up and what will make it stay there?
One survey revealed that consumers think they know their credit scores – but the truth is, they really don’t. At least, what they know is not enough to ensure that they will not make a mistake that will cost them a good credit score.
If you really want to maximize what you know about your finances, you need to make sure that you know the right credit score facts that will help you make the right decisions. This is especially true if you are trying to decide on how to pay off your debts because you want to specifically improve your credit score.
For instance, you have been trying to start a business but you keep on getting your loan application disapproved because you have so many credit card debts. So the plan is to pay it all off so you can improve your credit score.
The question is, what type of debt relief strategy will you use? The most ideal option is to consolidate debts because it has the least effect on your credit report.
4 credit score facts to consider before consolidating debts
While consolidating is the best option, there are credit score facts that will help you decide on what you will use. You have to understand that choosing the right debt consolidation strategy increases the chances of completely paying off your debts. To do that, pay attention to these 4 facts while you are choosing among your options.
Credit utilization works better than full repayment
For some people who want to immediately improve their credit score, they think that paying their debt in full is the best way to go. After all, no debt is a good thing, right?
That is not entirely true. Your credit score measures your credit behavior – not your balance. While your balance will play an important role, it is not the whole thing that will be considered.
What the credit score will measure is how you pay off your debts. So a steady payment in installments is a better way to improve your score faster. It is not what you do now that will be considered. It is actually your credit history. The more entries there are, the better it will be for your score. So making one huge payment will not have the same effect as compared to having multiple payments.
Mortgage payments are not reported
This is one of the credit score facts that a lot of people do not know. Making mortgage payments will not raise your score. This is because this is not reported to credit bureaus. This is why you need to think twice if you plan to consolidate your credit card debts through a home equity loan. If you plan to rely on your monthly payments on that equity loan to put more entry into your credit history, you might be disappointed. While this strategy will eventually increase your score, it will not be as fast as you would hope.
If you have another option to consolidate debts, you might want to consider using that.
Closing old credit cards has a negative effect
It is true that credit cards are very tempting. This is why it is advisable to only own the ones that you will really use. Some people get store credit cards because of the immediate discounts offered. Then they no longer use the card. At least, not as often as they should.
If you have these cards and you want to close them, you have to do it slowly. Closing credit cards will have an effect on your credit score and it will not be a good one. It will affect your credit utilization rate. Ideally, you want to bring your balance down before you close the cards. And once you start doing it, make sure it is spaced out and not done all at once. This will ensure that it will not affect your score.
Small balances are still destructive
This is the last of the credit score facts and it is probably one of the most destructive. When you pay off your debts, you need to make sure that you pay off everything. Do not leave even a few dollars and think that everything is already okay. Unpaid debts, even if it is not a lot can destroy your credit score. As soon as you miss a payment, it will be considered late even if it is only a few pennies. The longer it goes without payment, the more damage it will bring to your score.
This is a common mistake when consolidating debts. Some people already stop paying their debts when they apply for debt consolidation. Do not make this mistake. It is very important to keep on paying your dues until the debt consolidation transfer is complete. And once it is complete, go back and talk to your creditors and lenders to ensure that there is no balance left. If there is, pay it all off. Do this before you focus on the consolidated debts. This is how you ensure that you are consolidating debts successfully.
Why your credit score knowledge will protect your finances
Getting out of debt is not just about paying off your balance. It is also about making sure that your finances will be in the best condition once you get out of debt. This way, you will not be starting from zero after you have paid off everything that you owe. Having a good credit score is a great way to kick off your debt-free life.
This is why it is important to know the credit score facts. It will help you understand the effect of your credit choices.
Here are two things that this knowledge can change about you.
You are more cautious of your credit balance and limit
The relationship between the credit balance and limit makes up the credit utilization rate. Ideally, you want to have a 30% credit utilization rate. Based on reports, Gen X, Millennials, and Gen Z all have a credit utilization rate that ranges between 36% to 37%. That means a lot of people have to work harder to get the right rate between the balance and limit.
The more you know about credit scores, the more you will understand how the balance and the limit will affect your finances. This will make you more cautious about how you will spend using your credit cards. You know what balance to maintain to ensure that your credit score will be a good one.
You will make sure to pay your dues on time
Your knowledge of credit score facts will also make you feel a sense of urgency when it comes to paying your dues on time. The effect of late payments is too damaging so you want to ensure that the debt payments funds will always be prepared. You understand that it has to be made a priority because it can damage your credit score.
Fortunately, there are a lot of tools that you can use to ensure that you will not miss a payment. You can set up reminders a day or two before the due date. Or you can consolidate your debts so simplify the monthly payments. Consolidating the debts would mean having only one payment each month. This will simplify the whole process and make debt relief a lot less stressful.