Introduction

Managing debt effectively is crucial for maintaining a healthy credit score. At O1ne Mortgage, we understand the importance of financial stability and are here to help you navigate the complexities of debt management. Call us at 213-732-3074 for any mortgage service needs.

How Does Debt Affect Your Credit Score?

Debt can significantly impact your credit score, both positively and negatively. When you have a high amount of outstanding debt relative to your credit limit or a history of late payments, it signals to creditors that you may have difficulty managing debt. This can result in a lower credit score, making it harder to apply for new credit and leading to higher interest rates.

However, using credit cards and taking on manageable installment debt can improve your credit score. A healthy credit mix, including both revolving credit like credit cards and installment credit like loans, can positively affect your credit score. Adding positive payment history from these accounts to your credit report can also boost your score.

Good Debt vs. Bad Debt

Not all debt is created equal. Some types of debt can have a positive effect on your long-term financial health, while others can be detrimental.

Good Debt

Examples of good debt include mortgages, car loans, and federal student loans. These types of debt can help you build wealth, get to work reliably, and enhance your skill set, respectively. The key is to ensure that the monthly payments are affordable and that you pay them on time.

Bad Debt

Bad debt includes any debt that gets out of hand, comes with high interest rates, and doesn’t fit within your budget. Credit card debt that leads to high credit utilization rates and ongoing balances is an example of bad debt. Payday loans and car title loans, which can have effective APRs of 300% or more, are also considered bad debt.

How to Manage Debt

Managing debt doesn’t have to lead to a lower credit score. In fact, using credit cards judiciously and making regular payments toward installment loans can strengthen your credit. Here are some tips to ensure debt works in your favor:

Set up Autopay

For all credit card or loan accounts, pay your bills on time, every time. Set up automatic payments from a bank account each month to avoid late payments. For credit cards, set up autopay to pay your whole outstanding balance.

Pay Off Credit Cards Each Month

To keep credit card debt under control, aim to use less than 30% of your credit limit at all times. Ideally, use 10% or less of your credit limit on each card and across all of your credit cards. Pay off your outstanding balance every billing cycle to avoid interest charges and growing balances.

Seek Help Before You Miss a Payment

If there’s a possibility that you could miss a loan or credit card payment, take action and call your lender or issuer beforehand. Your mortgage lender may offer a temporary pause to your bills, called a forbearance; the credit card company may have a hardship plan. It’s always better to reach out and ask than to risk a late payment, which can hurt your credit score.

How to Improve Your Credit Score

To further improve your credit, consider taking the following steps:

Apply for a Secured Credit Card

A secured card is a credit-building tool that functions like a traditional credit card but requires a refundable cash security deposit. It’s a strong option for those new to credit or eager to build it.

Apply for a Credit-Builder Loan

This is another option for building credit in the form of an installment loan. As you make payments, they will appear on your credit report, and the balance will be available to you as a savings account at the end of the loan term.

Avoid Closing Your Oldest Credit Card

Even if you no longer use your oldest card, its age can benefit your credit score. Rather than closing it, consider using it for a small recurring purchase or asking the issuer to switch your account to a different card you’d be more likely to use.

Limit New Credit Applications

While opting for a secured credit card or credit-builder loan could improve your credit, taking on more credit cards or loans than you can handle will put you at risk of missed or late payments. Plus, too many applications for new credit can negatively impact your credit score.

Frequently Asked Questions

Should I Pay off My Credit Card Balance in Full or Over Time?

It’s generally best to pay off your credit card balance in full each month to avoid interest charges and maintain a low credit utilization rate.

Why Does My Credit Score Go Down When I Pay Off Debt?

Your credit score may temporarily decrease when you pay off debt due to changes in your credit utilization rate or the closure of an account. However, paying off debt is beneficial in the long run.

What Is a Good Credit Score?

A good credit score typically ranges from 670 to 739. Scores above 740 are considered very good to excellent.

The Bottom Line

Managing your debt strategically is crucial to maintaining good credit. Keep credit card balances low, pay off your total balance at the end of every month, and only take out loans that you need and can pay off as agreed. By ensuring you have a solid credit mix and keeping your oldest credit card accounts open, you can let your debt work for you.

For expert mortgage services and personalized financial advice, contact O1ne Mortgage at 213-732-3074. We’re here to help you achieve your financial goals.