How Your Debt Affects Your Credit Score

how debt affects credit score

One of the most influential factors of your credit score is your debt. In fact, debt makes up 30% of your credit score. Carrying too much debt can lower your credit score. However, not having enough debt can also cause your score to take a hit!

Confused? You should be. Let’s start with the basics.

What is credit utilization?

Credit utilization is used to calculate your credit score. This factor is the ratio between the credit you have available and the credit you have used. This ratio is determined for each credit card, loan, and mortgage that you have. The credit utilization ratio is also used to determine your overall credit availability and use.

You may think that not having any debt at all means you should have a perfect credit score, right? Wrong. If you do not have any credit available then this can actually lower your credit score. You want a low credit utilization ratio, and that means having open credit accounts.

Credit card example

You have a credit card with a $10,000 limit. You charge $1,000 on the card. You have utilized 10% of your credit available. This will boost your credit score.

You charge $8,000 on the exact same card. You have utilized 80% of your available credit. This is a high credit utilization ratio. Your credit score could drop as a result.

A higher credit card balance means more damage to your credit score. The worst offenders are over the limit and maxed out credit cards. You need credit available but not used for a low credit utilization ratio.

How your debt is handled is also important

Your debt management practices are also reflected in your credit score. When you pay off balances right away your credit utilization rate drops. Opening new credit accounts can also hurt your credit score. Having several credit cards which are maxed out can be very damaging. Using debt consolidation or bankruptcy can sometimes impact your score for years.

You need to show that you can manage your debt responsibly

This means only carrying the credit you need. Make all of your payments on time. If it appears that your debt is overwhelming your credit score will suffer.

Debt types on your credit report

There are several different debt types that you may have on your credit report. These can include:

  • Installment debt: This is a debt which involves equal monthly payments over a fixed period of time. If you have a car loan or mortgage it is usually an installment debt. This debt will show an I in the Current Status rating.
  • Revolving debt: With this debt type your monthly payment amount is based on your current balance. Credit cards are normally revolving debt. The credit report Current Status rating will start with an R.
  • Open debt: Open debts are not as common as the other two debt types. These are debts that require full payment each month. You do not have a set credit limit. Each month the full balance on the account must be paid.
  • Aggregate debt: This debt amount is just the total balances owed on all of your credit reports. If you have a mortgage, a car loan, and two credit cards it would be the balance of all 4 accounts total.

4 tips to boost your credit score

  • Try to keep any revolving balances that you have as low as possible. This will lower your revolving utilization ratio as well.
  • Request credit limit increases. It may not be possible to lower your balances significantly. If you receive a credit limit increase this can have the same effect. Your utilization ratio will go down and your score may go up.
  • Keep your older credit card accounts open. Older accounts in good standing add history length and will positively affect your credit score. If you must close accounts close the most recent ones first.
  • Use each credit card every month or two for small purchases. Pay the entire balance as soon as the bill comes in. This will keep the account open and active.

Your credit score and your debt are closely linked. Too much debt makes you a credit risk to many creditors. No credit or debt at all can also keep your score lower because your risk is not fully known.

Use your available credit wisely, and avoid unnecessary debt or numerous credit card accounts. This will help you achieve the best credit possible in your situation.


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