When it comes to the relation of credit score to debt, there is a lot of confusion out there. One misconception is that debt alone impacts your credit score significantly, while, in fact, your ability to pay debt off is what will have a larger impact on your score.
According to Experian data, the majority of Americans believe that having tons of debt will hurt their credit scores. This sentiment is only half true, though the data also shows that individuals who have high credit scores tend to also have the greatest amount of debt.
The question is, when it comes to debt and your credit score, does debt have a great impact?
Is Having Too Much Debt a Bad Thing?
People with the least amount of debt also tend to have the lowest credit scores. While that statement might seem a bit confusing, you have to consider the fact that it takes into account repayment habits as well. People with credit scores that range from 300-579 have around $38,000 in per
sonal debt. Compare that to those people with much higher credit scores, and you’ll typically find that their debt is around three times as much.
When it comes to the impact on your credit score, the important thing is whether or not you have the ability to pay off your debts.
If you want to improve your credit score overall, what you need to do is pay the debt that you have off in time. Paying off debt in time can generate a positive impact on your credit score. It is also worth having multiple types of credit, such as credit cards and installment loans. Having a variety shows that you can pay off various debt types.
What Things Determine Your Credit Score
Now that you know about the small(er) impact debt has on your credit score, you might be asking yourself, what things do have a great impact? At the foundation, there are five main factors that come together to determine your credit score. Not all of these factors are equal either, as some have a greater impact than others. These factors include:
- – Payment History
- – Credit Utilization Ratio
- – Account Age
- – Credit Variety
- – New Credit Inquiries
While the government does not set limits as to how much debt one person can carry, the recommendation is that an individual only utilizes one-third of their available credit at any time. Your score can suffer greatly if you carry too many loans or try and max out your credit cards.
Why Repayment Is So Important
It’s best to keep your balances low when it comes to credit cards. If you have high balances, it likely means that your credit utilization ratio is also high. Creditors look at this as an individual who spends far more than they have to spend.
To look like a responsible borrower to lenders, it is crucial to prioritize your repayment.