How Credit Card Debt Affects Your Credit Score

How Credit Card Debt Affects Your Credit Score

A number of elements go into your credit score. Although significant, the number that lenders use to determine your credit-worthiness extends further than just whether or not you make an income. Credit card debt and how you manage it can be one of the most important factors affecting your credit rating. In order to ensure you manage your finances to the best of your ability, you should know both the positive and negative ways that credit card debt affects your credit score.

Payment History

One of the most common factors in calculating your credit score is your payment history. Whether you make your payments on time, the number of late payments, and how late your payments are, all play a role in establishing a positive credit history. In fact, the largest factor in your score, making up 35 percent of your FICO calculation, is your payment history. Consistently making your credit card payments late or not at all, has a tremendous negative impact on your overall credit score.

Debt to Credit Ratio – Card Utilization

The amounts owed on your credit card accounts in relation to the available credit almost makes up as much of your score as the payment history. For credit card accounts, it’s best to keep the amount you owe below 30 percent of the total available line of credit. You most certainly want to avoid maxing out credit cards as this can affect your credit negatively. High balances and maxed out cards can indicate to lenders a high risk of over-extension and possible default. On revolving credit card accounts especially, make sure you continue to use your cards to keep them open, but also keep your debt to credit ratio, or credit utilization ratio down.

Type of Accounts

Your credit score isn’t just about credit cards either. The type of accounts you have makes a difference as well. A mixture of loans and credit card accounts are necessary for establishing a positive credit rating. So, if you’re afraid of adding a car loan simply because you don’t know how it will affect your credit, you can rest assured that it may actually help if you already have other types of credit accounts. Although the credit mix is a very small part of the calculation, it can still make a difference in your score.

Age of Accounts

You might think it’s best to close credit card accounts you don’t use in order to eliminate the chance of accumulating debt. However, the age of your accounts can affect your credit score quite a bit. If you can, keep the oldest accounts open and active, as closing them and keeping only new accounts, can actually have a negative impact on your credit rating. Unless there is an annual fee for the card, it doesn’t hurt to keep it open and occasionally use it to make a small purchase. You can also avoid paying interest on the purchase, most of the time, if you pay it off each month and avoid carrying a balance.

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