Another important factor weighed in your credit score is how much credit you have available to you versus how much you are currently using. Being maxed out everywhere is bad for your credit score. If you have credit but aren't inclined to use every bit extended to you, that helps your score.

If you consolidate your debt, you immediately pay off a bunch of debts. If those debts are credit cards, for instance, you still have available credit. In fact, you're just increased your available credit by paying off the card. That counts in your favor, too.

Last but not least, the philosophy behind debt consolidation is one of re-organizing or re-structuring debt, not simply trying to walk away from it or get a court to force creditors to write it off. Although it may not be called debt consolidation when businesses do it, large companies frequently have to re-structure debt to operate more efficiently. It is a standard business practice, one that makes good financial sense, and its primary purpose is to be sure that all creditors are paid in full according to the terms of the loan.

In other words, debt consolidation preserves your good name and your integrity. If you consolidate your debt, you credit report does not suffer. In fact, the credit report people may not even really know that you're consolidating debt. As long as you pay off what you owe, how you manage your money is your business.

Most other debt plans immediately go on your credit report. If you've tried to negotiate or settle a debt (work out a plan to pay less), expect that to get reported. Businesses want to warn each other that you might be the kind of person to make charges and try to find a way not to pay according to the terms you agreed to.

Bankruptcy is even worse on your credit report. It can be reported to future creditors for seven to ten years after the event. Many potential lenders won't extend credit to you if you have a recent bankruptcy and even those who will may be very meager and demand exorbitant interest. After all, you're now a "high risk" borrower.

The good news for everyone is that the credit score is a moving target. It changes constantly and no one event, whether it's a late payment or a bankruptcy, will affect your credit score forever. Think of your credit score as an encapsulated picture of how you handle your money: you get points when you manage it well and you lose points when you make financial mistakes. If you keep doing the right things with your money, your credit score will get better despite mistakes you've made in the past.

Here are some general rules of thumb for a good credit score: • You must have and use credit. A person who has never taken out a loan or paid off a debt can be the most reliable person in the world but he'll have trouble getting a loan. • However, you should have more credit at your disposal than you actually use. Maxing out is not a good thing. • Pay your bills on time and don't miss payments. • Don't default on a loan, skip out on paying a debt, or go into a program that tries to settle or negotiate your debt. This gets reported. • Avoid bankruptcy, if possible. That may not be possible in some cases, but bankruptcy should be considered a last resort not an optimal choice.

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