It’s commonly known that Americans are dealing with an overload of debt. What may not be so well-known is that debt can have a negative impact on your credit. Having too much debt can put a strain on your finances that also brings down your credit score. Learn how debt can affect your credit.
Part of your credit score – 30% to be exact – is based on the amount of debt you have. This portion of your credit score takes into account the amount of your credit card balance relative to your credit limit, the amount of your loan balances, and the total amount you owe on all your accounts.
The more you owe on your credit card and loans, especially relative to your credit limit and original loan balance, the more your credit score will be hurt. That is how too much debt can directly impact your credit score.
Your debt could indirectly affect your credit it influences you to make other credit mistakes. For example, if your debt causes you to be so overextended that you miss your credit card and loan payments, then your credit score will be affect. If you miss other payments, like a library fine, your account could be sent to a collection agency. Debt collections have a significant impact on your credit score. Payment history is 35% of your credit score. It has a bigger influence on your credit score than any other factor.
If you open up balance transfer credit cards or home equity loans to try to shuffle around your debt, the additional credit inquiries will have an impact on your credit score. Each time you make a new credit card or loan application, an inquiry is placed on your credit report. Inquiries make up 10% of your credit score. Though it may be a small percentage, it could be the difference between a fair credit score and a poor credit score.
Paying off debt can improve your credit score. As you pay down your credit card and loan balances, you’ll gain more credit score points because you’re lowering your total amount of debt and because you’re paying your accounts on time. Even if having too much debt hurts your credit score in the short-term, your credit score can rebound if you focus on lowering your debt over time.