Posts Tagged ‘payday debt consolidation plan and your credit rating’

How Does A Payday Debt Consolidation Plan Affect Your Credit Score?

In order to understand how a payday debt consolidation plan can affect your credit score, you must first have a thorough understanding of all those five major factors that determine your credit rating. These fives factors include timely (or untimely) payment of your debts, the amount of debt, mix of different types of credit, debt to credit ratio (credit utilization ratio), and inquiries for new credit. Your debt payments contribute to 35% of your FICO score. 30% depends on the amount of debt you owe. 15% is based on the different types of credit you are using. 10% depends on your credit utilization ratio, which is how much debt you owe against the maximum credit limit allowed to you. And, the remaining 10% is determined on the basis of how many inquiries you are making for nee credit. For example, if you are making a lot of inquiries for new loans, it will affect your credit rating negatively. Now, following is a brief rundown on how a consolidation plan affects these factors and in turn affects your credit score.

How Your Creditors Report To The Credit Bureaus?

Before you sign up with a payday debt consolidation plan, you must first find out how your creditors will be reporting the payments made by you (as part of the consolidation program) to the three major credit bureaus, which are TransUnion, Equifax, and Experian. If your creditors report to these bureaus that they are receiving payments as part of a debt consolidation agreement, it will seriously damage your credit score. Therefore, it is important to do some basic homework before you start making payment as per the consolidated program. For example, if your debt accounts are in collection status, you should make sure that your lenders agree to remove the collection status. Likewise, you also need to convince your lenders that they must report all the payments as ‘paid in full’. When timely payment is reported to the credit bureaus, it will actually result in an increased credit score.

Overall, as you can see whether a payday debt consolidation plan affects your credit rating positively or negatively depends very much on how your creditors report your payments to the credit bureaus. But, you must not forget other factors as well. For example, you should not make any further default. You should not inquire for new credit until you pay off all your debts. You should try to make larger payments toward your debts. The faster your debt balances reduce, the better it is for the health of your credit.

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What are the pros and cons of debt consolidation?