There is a lot of confusion in society regarding the amount of debt one carries in relation to one’s credit score. Debt alone won’t impact your credit score as much as your ability to pay it off will. Data shows that most Americans believe having a significant amount of debt will hurt their credit score. This is only partially true, but data also shows that individuals with the greatest amount of debt tend to have the highest credit scores. So when it comes to your credit scroe and debt, how does debt impact your score if you can owe large sums of money and still have an excellent score?
Is Too Much Debt a Bad Thing?
As mentioned above, those with the least amount of debt often have the lowest credit scores. This can be confusing, especially if repayment habits are not taken into account. Individuals with credit scores ranging between 300 and 579 had roughly $38,324 in personal debt compared to those with higher scores who carried roughly three times this amount. This means credit reporting agencies are taking more into account than just the amount of debt carried by consumers. Your ability to repay your debts will have a much greater impact on your score than the actual amount of debt you have.
With this considered, there is no need to significantly increase the amount of debt you have if you want to improve your score. Paying off the debt you have on time will have more of a positive effect on your score than charging off multiple credit cards and not repaying them. You can also try getting a mix of credit types, such as loans and credit products, to show you are capable of repaying various types of debt. Consumers with a good mix of credit products on their records tend to have much higher scores than those with only a single type of debt.
What Determines Your Credit Score?
So, if the amount of debt you carry doesn’t impact your credit score, what does? In general, five primary factors determine your credit score. Some of these factors are more important than others, but they can all cause your score to increase or decrease over time. These factors are:
- Payment history
- Amount of debt in comparison to the amount of credit utilized
- Age of credit accounts
- Mix of credit accounts
- New credit inquiries
Although there is no limit on the amount of debt you can carry, it is recommended you only utilize one-third of your available credit at any given time. If you attempt to “max out” your cards or carry too many loans you can’t repay, your score will suffer greatly.
The amount of debt you owe accounts for nearly 30 percent of your overall score. This debt is also known as your credit utilization ratio, and as mentioned above, it is the amount of debt you have in relation to the amount of credit you have been extended. For example, if you charge $200 on a credit card with a $1,000 limit, your credit utilization ratio is 20%. It is best to keep your credit utilization below 30 percent, but for those with the highest credit scores, 10 percent is a better goal. If you have too much debt in relation to credit, you will be considered a high-risk borrower by lenders.
What Type of Debt Do You Have?
As previously addressed, the type of debt you have can have a major impact on your overall score. Individuals with excellent credit scores have a variety of different credit products, such as installment loans, credit cards, and mortgages. The type of debt you hold accounts for 10 percent of your credit score, so it is important to have a nice mix of credit products in your financial arsenal. There is no reward for carrying more debt, so even if you do have a decent mix of credit products in your name, be sure to pay them off on time.
The Importance of Repayment
When it comes to credit cards, it is always helpful to keep your balances low. If your balances are too high, it means your credit utilization rate is too high, which to creditors, looks like you spend beyond your means. By repaying your debts on time, you can also prevent interest from accruing, since you only accrue interest if you carry a balance. The longer debt remains on your record, the more interest you will have to pay over time. In other words, paying off your debt can have a positive impact on your bank account and save you money.
Repayment also signals to lenders that you are a responsible borrower. No one wants to lend money to someone who won’t pay them back, so paying off your debt, no matter how much you have, is always in your interest.
Here at Coast Tradelines, we specialize in helping individuals raise their credit scores with reliable and legal tradelines. We understand that having a low credit score can be limiting, and we want to do everything in our power to help you. Contact Coast Tradelines today at 619-363-1472 to learn more.