Effects Debt Management Places Have on Your Credit Score

Some people may be concerned that the effects debt management companies have on your credit score could be just as bad as filing for bankruptcy. While using a debt management company may not be the best option, there are different ways that a debt management company will affect your credit score. These are both good and bad, so it is up to each individual to decide what is right for him and his personal credit score.

Function

The function of a debt management company is to negotiate with your creditors. They negotiate the interest rate as well as the amount that you actually owe. These debts are put into a lump sum so that you may pay a smaller amount monthly rather than struggling to pay minimum amounts on each debt every month.

Effects

According to My Fico (myfico.custhelp.com), your Fico credit score is not going to be significantly affected by using the services of a debt management company. If you are seeking the help of a debt management company, your credit is likely to be affected already. A debt management company may affect your credit score negatively but that affect will be minimal. This will occur because rather than paying the full amount owed to your creditors, you have instead settled for a lower payment, which can have a negative effective on your credit. However, in the long-term, the positives of managing your debt far outweigh the negative.

Benefits

A debt management company is going to help you to pay off your debts faster because the payments will be less, the money owed will be less, and the interest rates will be lowered. This means that eventually your credit score will improve.

Time Frame

The time frame is up to you and the debt management company you choose to work with. However, just like a bankruptcy, debt management can have an affect on your credit for several years. This is due to the fact that your creditors will be reporting your activity with them as long as you are doing business with their company. Once your business is done, this activity will stay on your credit report for seven to 10 years.

Warning

A debt management company can negatively impact your credit score if you fail to follow through with making your designated payments. While the debt management company makes payments to your creditors, you must provide payments to the debt management company. The debt management company has no affect on what your creditors report to the credit bureaus.

Potential

There is a lot of potential in debt management companies in helping you improve your credit score. It is up to you to work with the debt management company to improve your own score; they cannot do all of the work for you. If you do it right, then you will eventually see an improvement in your credit score.

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What Can You Do to Fix a Credit Score?

A strong credit score can mean the difference between getting a home or auto loan at a great rate and not getting a loan at all. Most often, a poor credit score means that loan options are still available, but at much higher rates of interest. The cost of higher interest over the life of a loan can add up to hundreds or thousands of dollars that would be saved by waiting until credit scores improve to apply for credit.

Request Free Copies of your Credit Reports

Log on to a site such as annualcreditreport.com and request credit reports from all three reporting agencies (see link in Resources). Check each report for accuracies and errors. Make corrections as needed.

Pay Down Debt

Your credit score is an objective number based on several factors, including your debt-to-credit limit ratio. Maintain your credit card balances at 30 percent (or less) than your credit card limits.

Pay Bills On Time

Paying bills late has a negative impact on your credit score. If you have paid late previously, paying by the due date from this point forward will improve your credit score with time.

Manage Different Types of Credit Well

Credit scores are improved with a mix of credit accounts. Managing a combination of credit types, such as revolving (credit cards) and installment (auto or mortgage), improves credit scores.

Get Back in the Saddle

Past credit problems, such as bankruptcy, can make for reluctant borrowers. To rebuild credit scores, you must manage credit. Start with a secured credit card.

Avoid Quick Credit Fix Promises

Don't fall for promises to fix credit scores. If the information on your report is inaccurate, you can have it removed yourself for free. If it is accurate, it will not be removed for 7 to 10 years from the date of last activity.

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How to Appeal an Unnamed Negative Report on Your Credit History

By law, consumers have the right to dispute or appeal negative items on their credit report. Consumers also have the right to know the details of their debt, including the company claiming the debt. This was all made possible due to amendments in the FCRA (Fair Credit Reporting Act). Learn to appeal inaccuracies and negative items on your credit report.

Instructions

1

Pull your credit report from all three major credit reporting agencies: Experian, Equifax and Transunion. You need to determine each credit reporting agency that has received the inaccurate information. Your credit report will vary between the agencies; some items may not be included on all three reports, including negative items.

2

Contact the credit reporting agency by certified mail. Make a copy of everything you send. Send them a letter explaining your situation and the inaccurate item on your credit report. Let them know the company that submitted the item was unnamed. It may be best to use a sample letter provided by the Federal Trade Commission, with your information substituted.

3

Wait up to 30 days for a response from each agency you have contacted. Once the credit reporting agency receives the claim, they will investigate the situation by contacting the company and asking for proof of the negative item. If the company cannot be reached or does not provide proper proof of the negative item, it will be removed from your credit history.

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How Far Back Do Credit Checks Go?

Credit checks are your ticket to everything from a new credit card account to a loan for furniture, a car or even a new house. The Federal Reserve Bank of San Francisco's website explains that the credit bureaus gather your financial data and compile reports for lenders. They cover your credit-related activities for several years to give a long-term picture of your credit worthiness.

Reporting Time

Lenders check your credit by reviewing your credit reports from the Experian, TransUnion and Equifax credit bureaus. Their review goes back as far as the dates of the information on those reports. Reporting time frames vary, depending on the specific type of information. The Federal Trade Commission (FTC) explains that a bankruptcy stays in your records for 10 years, while most other negative information, like late payments, car repossessions and foreclosed homes, remain for seven years. Closed accounts that were in good standing show up for 10 years, according to the Experian website.

Credit Scores

Credit scores are calculated based on your credit bureau files, so they consider information going back seven to 10 years. FICO, the largest scoring company, explains on its website that it considers things like promptness of payments, current and previous account balances and credit limits, length of time you have used credit and how long you have had particular loans and credit cards. Your score continually changes, according to the MyFICO site, so it goes up when old delinquencies or other negative data gets erased.

Considerations

Everything in your credit reports is visible to lenders who view them while processing your applications, but they do not weigh everything equally. Lita Epstein explains that they look most closely at your recent activity, focusing on the past three to five years. You have a good chance of getting approved for a credit card or loan if you have built up several years of on-time payments, even if you have collection agency accounts or even a bankruptcy in your past.

Warning

Negative credit report items do not always get erased when the reporting period ends. You are allowed to get free credit report copies to check their status. The FTC explains that you must get the reports from the official website, annualcreditreport.com. Search for old items, and file a dispute with Experian, TransUnion and Equifax is you find any outdated data. The bureaus let you do this electronically on their websites, and the law gives them 30 days to handle your complaint. Then they are required by the Fair Credit Reporting Act to send you corrected credit report copies so you can be certain the old items are gone.

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FICO Scorecard Characteristics

Whenever you apply for credit, your FICO score serves as the historical record and monitoring tool for the measurement of your credit worthiness and predictive credit behavior. The scoring system was established in 1956 by the Fair Isaac Corporation. The three major credit bureaus, Experian, Equifax and TransUnion, use this rating system which focuses upon repayment history, balances owed, credit history length, recent or new credit and types of credit.

Overall Ratings

Good credit ratings result in credit acceptance, lower interest rates and higher loan amounts.

Each of the three major credit bureaus conduct an independent rating of your credit worthiness, which affects your ability to obtain credit under the terms offered by creditors. The numeric codes range from 300indicating a very low scoreto 800, which is the highest possible score. A score below 620 is viewed as being low and will result in difficulties when applying for loans, while a score of 720 is considered excellent with low credit risk and a high probability of credit approval. The higher the credit score, the lower the interest rate.

Repayment History

Repayment history represents a large portion of your FICO score.

The repayment history portion of the FICO score counts for 35 percent of your overall rating. Therefore, it's important that you pay all obligations on time including medical bills, parking tickets and fines since your history serves as a focal point for the future.

Balances Owed

The debt to equity ratio of your loans should decrease or remain stable.

The balances owed section of the FICO score counts for 30 percent of the total. As the number and amount of balances owed for credit cards and revolving lines of credit increase, your FICO score will decrease. When your credit card balances increase relative to the amount of credit available, your score is negatively impacted because your debt to equity ratio is increasing.

Length of Credit History

Credit history that withstands the test of time helps your FICO score.

The length of your credit history counts for 15 percent of your total FICO. If you have used only a few credit cards over a longer period of time and have repaid auto loans within the proper time frames, your FICO score will be positive because it indicates that you are a responsible borrower who is likely to repay their debts.

Recent or New Credit

A rash of new credit cards obtained and inquiries lowers your credit score.

Recent or new credit accounts opened as compared to the total number of existing accounts shown on your credit reports could hurt your FICO score because it might signal financial trouble. Also, a sudden increase in the number of new inquiries by credit card companies for your credit history could create warning signs and lower your score. However, short term shopping for mortgage or auto loan rates should not hurt your rating as long as the inquiry period is short term. This section counts for 10 percent of the total score.

Types of Credit

Your FICO score is helped by having installment credit as well as revolving credit.

Diversification of credit helps your FICO score by demonstrating the level of commitment you have toward paying down various types of obligations such as mortgages, auto loans and credit cards.

Fair and Accurate Credit Transactions Act (FACTA)

FACTA is a consumer law that allows you to have access to your credit information.

FACTA was passed into law during 2003 in order to provide consumers with access to their credit reports. FACTA allows you to obtain a free credit report from all three credit bureaus once a year. It also allows you to report errors to the credit bureaus for purposes of having them removed.

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How to Fix Credit Problems With Personal Loans

Fixing your credit and raising your score requires developing better credit habits. Although it's not easy to obtain personal loans with credit problems, acquiring a loan and paying off the balance will increase your credit score and put you on the path towards good credit. If looking for a way to improve your credit, consider applying for a small loan with your bank or credit union.

Instructions

1

Use a co-signer. You probably will not be able to obtain a personal loan on your own. Ask a family member -- such as spouse or parent -- to co-sign your personal loan.

2

Secure your personal loan with collateral. Use a personal piece of property such as a vehicle title as collateral for your loan. If unable to repay your loan, the lender can take possession of your property.

3

Borrow a small amount of money. Opt for a small personal loan, which is easier to pay off.

4

Compare loan rates. Request loan quotes from at least two lenders to compare personal loan rates.

5

Complete an application and close on your loan. Submit an application for a personal loan and wait for an approval notification. Once approved, schedule a date to close on your loan and receive funds.

6

Make timely payments. Mail monthly payments several days before the due date to avoid a late payment and fix your credit score. Timely payments add points to your credit score.

7

Pay off the personal loan. Satisfying or paying off debt improves your credit rating. Aim to pay off the personal loan within a few months to fix your credit.

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Does a Car Loan Raise a Credit Score?

Car loans and other credit accounts are part of your financial history. They get added to your credit reports by TransUnion, Equifax and Experian. These three credit bureaus provide the information to lenders who evaluate your future applications, and it is also used to calculate your credit score. Vehicle loans can raise the score if you handle them appropriately.

Definition

Your credit score is a three-digit number calculated by FICO, which is the original scoring firm, and the credit bureaus. The score is based on many factors. FICO explains that it considers things like your current loans, including the original balances, amounts owed and whether you make your payments on time. Paid-off accounts have an influence, too, although past car loans do not have as much impact as recent ones. A high FICO score helps you get approved for credit more easily and qualifies you for better interest rates.

Effects

A car loan raises your credit score when you make your payments on time. FICO advises that your overall payment history on all your accounts, along with any related charge-offs, collection actions and court judgments, makes up more than a third of your score. You help your score even more if you do not open other unnecessary accounts while paying off your vehicle. FICO penalizes you if your debt load is too high.

Considerations

Vehicle loans are especially beneficial to borrowers who are establishing a credit history for the first time. Lenders are leery about extending credit when you do not have much of a history. You can get a secured credit card if you give the bank a deposit for collateral, but MSN Money financial writer Liz Pulliam Weston explains that you need a mixture of account types to properly establish yourself. Credit cards are revolving accounts, while car loans are installment accounts, so your score goes higher when you have both and manage them properly.

Challenges

You will have trouble getting a car loan if your credit score is bad or you have other challenges like low income or a short employment history. You can qualify if you find a co-signer who has a high score and use the account to build up your own credit records. The co-signer is equally responsible for repayment, according to Pat Curry of the Bankrate money management website, so you damage that person's credit score along with your own if you stop paying for the car.

Warning

Car loan contracts usually allow the lender to seize the auto if you skip even one payment. This hurts your credit score, and the repossession stays on your credit reports for seven years. Even if your car is not repossessed, a string of delinquent payments destroys any progress you made previously in raising your credit score with the loan.

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