The Relationship Between Credit Scores and Debt Resolution

In the last couple of year’s credit card companies and credit monitoring services have made access to credit scores widely available. Scores are offered with credit card monthly statements and can be obtained free when credit monitoring services are subscribed to. The increase in identity theft has prompted wider access and encouraged consumers to monitor their scores on a consistent basis.

Having your credit score and understanding what it means is a completely separate matter. The score, independent of a credit report, does not provide much useful information. It would be like saying it is 5 degrees warmer today than it was yesterday, or the stock market is up by 50 points. Without a point of reference, the information is not very valuable.

Just knowing you have a 500, 600 or 700 score does not explain why or help you understand how to improve the score. What it does do, is provide a starting point as the ability to find out how your score impacts your financial life, and what you can do about it. This can be accomplished when you combine the credit score with a credit report and understand the algorithms that are used to establish your credit score.

How is Your Credit Score Calculated?

Credit scores range from 300 to 850. Below 500 is considered bad credit. 501to 600 is seen as poor credit and 600to 660 is fair. Having a score above 661 to 780 is evaluated as good credit and above 780 is considered excellent credit.

The calculation of the credit score has a number of key elements. The breakdown for a FICO score, which is the most widely used score by banks and lenders, looks like this:

  • On time payment history for 7 years                 35%
  • Utilization Ratio (How much you owe in relation to available credit limits) 30%
  • History and how long credit has been established                 15%
  • Access to new credit                 10%
  • Types of credit you carry (loans versus lines of credit)                 10%

Payment history will include late payments along with collections, judgments, tax liens and other forms of debt that are owed. More recent late payments score much higher than older late payments.

The actual month by month history is available on your credit report. There are three credit bureaus that companies report to. These include Equifax, Experian and Transunion. Your score will vary among the credit bureaus because not every company reports to all three bureaus.

The credit score is calculated based on information found on the credit report. Once a year you have free access to your credit report from each of the three credit bureaus. This can be obtained from Other companies that sell credit monitoring services will offer a free report up front when you sign up for their monitoring services.

How Will A Debt Resolution Program Impact My Credit Score

One of the hesitations in signing up for a debt resolution program is the immediate impact on the credit score. In your efforts to stay above water and make on time payments, you also want to keep your credit score as high as possible. There are two concerns with this strategy. First is that because you are so highly leveraged, it is very difficult to get approved for a loan even if you manage to maintain a decent score. The second is that every time you miss a payment the derogatory mark remains on your report for another 7 years. This can extend the length of time your credit score is impacted by the high debt for many years.

Credit card companies are known for being very aggressive with fees. If a payment is one day late you are assessed a late fee. If you are late twice in a 12 month period and they may increase your interest rate to the penalty rate which can be as high as 30%. These actions make it even more difficult to make on time payments and increase the chances of more late payments, lower credit scores and default.

While a debt resolution program will usually result in a temporary drop in your credit score, it provides immediate relief by reducing your monthly payments. Typically monthly payments are cut by 40% and you will find yourself able to pay off the debt in a few short years, allowing your score to recover quickly. Making only minimum payments could take up to 30 years to pay off the same debt load, leaving your credit score in jeopardy for a much longer period of time.

Having a single reduction in credit score, that will turn around as the debts are paid off will provide much faster recovery of your credit. Each time a late payment is made, the clock starts over and your credit score is impacted for another seven years. The average debt consolidation results in the debt being fully retired in less than five years. A temporary drop in score is a small price to pay for long term good credit and immediate payment relief.

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