Your Credit Score & Debt Relief

Understanding how your credit score can affect your debt relief choice will help you to make better financial decisions.

To begin with, you may be wondering what a Beacon or FICO rating is, and how it is used by creditors to determine your credit worthiness.

It is an industry standard for calculating a reliability factor (creditworthiness) for credit applicants. Your score is the number one criteria that most creditors use to determine what interest rate you will be charged on your mortgages, loans, and credit cards.

It is calculated based upon the information available in your credit report. Your report is used to determine your eligibility to receive credit, along with other strategic information that each creditor determines. All of these financial factors help to determine your financial health - and to be healthy financially depends on obtaining, and maintaining, a good credit rating.

You Can Have A Different Score With Each Agency

The three major credit bureaus, Equifax, Transperian (formerly TRW), and TransUnion, carry information about you and your credit. This can result in your having 3 different ratings if the data is different from bureau to bureau, which is often the case. 

It's always a good idea, to check your credit reports, and scores, once or twice a year. If good information is missing from one bureau, or incorrect information is present, you can request it be fixed so your reports show the most accurate, and complete, information available across all three major credit bureaus.

Fair Isaac Company created the Beacon FICO score which is the one most commonly used.

The Beacon FICO Credit Score Ratings

Beacon FICO ratings range from 350 to 850, with 850 being the best rating (which gets you the lowest interest rates). Below 600 is when you may have loans turned down, or see much higher interest rates than those commonly advertised. Ratings commonly used and seen are:

Man climbing credit score ladder

How Does This Affect Your Debt Relief Choice?

For anything below the 560 rating, if you filed bankruptcy it would have a much lesser effect on your credit rating than if you filed with a rating better than 700. With a higher credit score, you might want to look at refinancing your mortgage or getting a home equity loan to restructure your debt instead of bankruptcy.

If loans aren't available to you, then you may need to consider a debt consolidation service as a means of debt relief. Debt consolidation services would be the next step with the least impact on your credit rating, after debt consolidation loans. 

If you have funds available, or can obtain them at a reasonably low interest rate, you should consider making large payments on your higher interest charge cards (or paying off what you can).  This will help reduce the total amount of monthly payments you have to make which would then give you breathing room in your budget.

Wendy tried a combination of tactics to help reduce her debt and improve her credit score:

I had bad credit for years, only to do something stupid and get myself in even more debt trying to get better. Eventually I pulled my 3 credit report scores. Then I started researching negatives that were hurting me. I did this to figure out what mistakes I was making.

Next I set up payment plans with a debt consolidation plan. It worked temporarily but it was hardly hitting any of the principal.

The thing that really saved me in the end was furthering my education and finishing off my bachelor's degree. After that I was able to get a better job and improved income. So the new job and the debt plan together starting slowly  winding down my debt. With this method, I have improved my credit score by about 150 points in the last 3 years.

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