The way that you manage your credit card debt can have a profound effect on your credit score. Some behaviors affect the equation output only temporarily, while others stain your consumer report for seven or ten years, and drag your rating down the entire time.
Therefore, it is important to know which factors affect your score temporarily, and which do damage that is more lasting. Banks report balance amounts monthly, so the amount owed is temporary, and can change quickly.
When Credit Card Debt Hurts your Score
Having large amounts of credit card debt hurts your credit score far more than it helps. You need to borrow money in order to give the equations some data to make a reliable prediction of future payment performance.
However, carrying large revolving balances is not the type of behavior that demonstrates financial stability. High utilization ratios suppress your ratings.
Utilization Ratio
High amounts of credit card debt increase your revolving balance utilization ratio, which hurts your score. You calculate the revolving balance utilization ratio by dividing the total revolving balances by the total limits into all your revolving accounts.
Most credit cards are revolving accounts. You have the option of paying any amount above the minimum payments. Charge cards require payment in full every month and do not fit the definition.
A high utilization ratio tends to hurt your score. A high utilization ratio is a sign of trouble brewing on the horizon. One unexpected expense, one job loss, or one episode of disability and everything comes tumbling down.
Paying Credit Card Debt Improves your Score
The best way to improve your credit score is to pay down the credit card debt that appears on your consumer report. The equations consider the total balances and utilization ratios based upon what appears on your file.
The key to improving your score then lies with lowering the amount of debt that appears on your consumer report. You can achieve this through consolidation, Debt Settlement or by paying the account in full while reducing or stopping new charges.
Consolidation Programs
Credit card debt consolidation programs may improve your score, provided you stop spending, and do not run up a new balance on your revolving accounts. Several things occur when you consolidate. Some factors lower your number while others lift it higher.
The lender will log a hard inquiry when reviewing your application. Hard inquiries will suppress your score temporarily on the bureau report used by the lender.
If approved, the lender will report the new installment loan account to each of the three bureaus. New accounts can two different effects.
•Lower the average age of your accounts, which helps.
•Improve your account mix, which tends to hurt.
When you conslidate your credit card debt using a debt using a personal installment loan, the bank then reports a new payment status, and smaller amounts owed.
•A paid as agreed status is better than a delinquent status, which immediately improves your rating. Payment history comprises 35% of your number.
•Your total revolving balances, and revolving utilization ratio will drop, which tends to improve your rating. Revolving utilization comprises 30% of your number.
Paying Balances in Full
Paying your credit card balances in full every month may have no effect on your score at all. By paying the balance in full every month, you no longer incur interest charges. Paying interest does not affect your rating, but the balance amount reported by the bank does.
Paying your revolving balance in full does not guarantee that the bank will update your file with a zero balance. The bank updates your balance at the end of each billing cycle, before it processes your payment. When the bank receives your payment twenty days later, new charges may have accumulated on the account. As long as you keep charging on the account, you never reach a zero balance.
Debt Settlement
Debt settlement is a debt repayment strategy where you negotiate with your creditors to accept a partial payment as full satisfaction for the debt. If the creditor agrees, you pay just a percentage of your outstanding balance and the rest of the debt is cancelled for good.
You Can Avoid Bankruptcy
The biggest reason that people choose debt settlement is to avoid bankruptcy. Bankruptcy is a debt solution that will follow you for the rest of your life. The bankruptcy entry remains on your credit report for 10 years, but many loan, credit card, and job applications ask if you’ve ever filed bankruptcy. If you answer no and the bank later finds out that you actually did file bankruptcy, you could be found guilty of fraud. In the case of employment, you could lose your job.
Settling debts with your creditors, when it’s done right, can help you avoid filing bankruptcy and dealing with the consequences of a bankruptcy.
Debt settlement will only stay on your credit report for seven years.
There’s no public record of you ever having settled your debts, so once the credit reporting time limit has run on your settled accounts, you won’t have to deal with the settlement anymore.
Relief From Overwhelming Debts
The goal of debt settlement isn’t to get over on your creditors by paying them only a portion of the debt you accumulated.
So it’s unwise to rack up a large amount of credit card debt with the expectation of settling it all.
If you’re legitimately having trouble paying back what you owe, debt settlement may help you. Once you’ve negotiated and paid your settlement, you’re essentially debt free in less time and at a lower cost than if you tried to pay off your debts on a typical repayment schedule.
Comparing debt settlement to bankruptcy, creditors may not get as much from you even if you filed Chapter 13 Bankruptcy. They may not get anything at all if you file Chapter 7, even though it is nearly impossible to get approved for a Chapter 7 these days, creditors know the risk and this is why they accept settlement offers.
