Credit Score Articles

How Does Debt Management Affect My Credit Score?

Millions of Americans are struggling to get out from under debt and understand their credit scores. If you’re in this boat, first it’s important to take a look at how you’re currently managing your debt and how that’s impacting your score.

Assess Your Credit Card Debt

The way you handle your credit cards has a heavy impact on your credit score. Paying your bills on time is important, but it’s only one component in managing your accounts wisely. The amount of debt you are carrying on your credit cards also affects your credit score, with higher or maxed out balances having a more negative impact on your three-digit number than a low ‘utilization ratio’. Add up all of your credit card balances and look at what you owe in relation to your account’s credit limit. If you’re using more than 30 percent of your available credit across all credit card accounts it may have a negative impact on your credit score.

Know That Not All Debt Is Bad

Many people think that debt is bad. If we look at the ongoing financial crisis, which was largely the result of overspending and taking on too much credit, it’s easy to understand why this belief continues to pervade many Americans’ minds. While having too much debt can be problematic, the solution is in how you manage your debt.

In some instances, taking on debt to purchase a home or attend a university is necessary to accomplish that larger goal. In fact, these types of debt can actually help your credit score, if you manage your balances wisely. Managing a mixture of credit accounts, not solely credit cards, gives lenders a stronger indication of how they can expect you to behave. That’s why a more robust credit history strengthens your credit score.

Avoid Unnecessary Debt

If you are already managing multiple lines of credit on a day-to-day basis, reconsider whether an additional credit card or loan is really necessary and make sure you can handle the responsibility. First, focus on managing the debt you already have, before adding a new one to the mix.

The way you manage your credit accounts is directly tied to the health of your credit score, so it’s important to assess your spending and current levels of debt. Learning how to control your debt responsibly may help you stay on top of your finances.