The debt that you create, and how you handle that debt, affects your credit score acutely. How you manage your debt also will have an impact on your ability to borrow more money today and in the future and affects your interest rates.
The actual amount of debt that you have at any one time is one of the biggest determining factors of your credit score. In fact, 30% of your credit score is weighed on the amount of debt you carry. Your credit utilization is the ratio between your total credit balance and your credit limit. The higher the balance you have in respect to your credit limit the worse your credit score is going to be damaged. Maxed out credit cards, for example, affect your score the worst.
Carrying a lot of debt will hurt your score and affect your ability to get new credit and new loans, especially if the amount you are carrying is mostly high credit card debts. Your credit score is also based on how close your mortgage loan payment is to the original amount of the mortgage and so paying your mortgage first will help your score.
Using your credit cards too often to the point that you can’t make payments on time will damage your credit score also so it is vital that you learn how to use them wisely. Paying off your credit cards quickly and on time will raise your score because of the simple fact that you’re lowering the amount of credit utilization that you have.
Debt settlements and bankruptcy can result in damage to your credit report that may take months or even years to clear and, even though it doesn’t directly affect your credit score, debt consolidation can have a negative impact on your credit report.
One myth about credit is that you should always carry a balance to boost your credit score and keep it higher. The simple fact however is that this isn’t true and, as mentioned above, carrying too high a balance can actually hurt your score in the long run.
Finally remember that the types of accounts that you have carries 10% of the weight of your score and if you have a varied portfolio of credit like credit cards and loans it can actually help your credit score. If you have never had a home mortgage for example and you add one your score will usually rise. Just be careful not to get extra cards to try and boost your score because it could backfire and hurt your score in the end.