Discover How Your Credit Score Affects Your Debt Obligations
Many people across the United States are dealing with some form of debt. In fact, according to the Federal Reserve Bank of New York, the overall household debt in the U.S. reached a total of $17.3 trillion! If you are struggling with debt, it’s easy to feel discouraged about your situation and you may be unsure of what steps you should take to move forward.
Of course, there are different methods available that can help alleviate your debt obligations. But first, it is important to understand the different factors that led to your predicament in order to find a viable solution. For example, unpredictable things like emergency expenses and inflation are difficult to control and avoid. However, bad spending habits can lead you to struggle with excess debt if you don’t put in the work to change them. By working with effective financial strategies like a budget plan, it becomes easier to bypass your circumstances and learn how to manage your finances!
It’s important to note, though, that your credit score does not exist in a vacuum, and having a low credit score can impact many aspects of your life. If you’re asking, “How does my credit score affect my debt?” you can continue reading to learn the correlation between your debt obligations and your credit history:
Low Credit Scores May Keep You in Debt
A low credit score can have many consequences that will affect your finances in the long run. Not only can it disrupt your chances of securing a debt consolidation loan, but it can also limit your renting options and employment opportunities. Auto and homeowners insurance companies use your credit score to determine your insurance premiums and may increase your rates if you have a bad credit score.
Let’s say you’re able to secure the loan you need to reduce your debt, but your credit score is low. In that case, it’s possible that you’d obtain a high interest rate that makes it 10x more expensive to borrow money. If you mix those monthly loan payments with your current expenses, it can be difficult to escape that debt cycle.
If you’re trying to alleviate your debt, then a bad credit score has the potential to keep you trapped in debt. Fortunately, secured loans like title loans tend to be easier to obtain despite your current credit history. Simply use an asset as collateral for the loan and get the funds you need for your financial situation. In some cases, you may qualify for competitive interest rates compared to those from a regular debt consolidation loan.
Opening Too Many Credit Cards Can Impact Your Score and Tempt You
If you’re dealing with debt, you may think a credit card is the best solution to cover your payments. However, if you open multiple accounts in a short amount of time, your credit score can take a nosedive. Additionally, lenders will view you as a lending risk and may not approve you for the loan you need to consolidate your debt!
That’s why it’s essential to thoroughly review your situation and determine if having more than one credit card is necessary. While it seems like a safe solution to reduce your debt with a credit card, it’s best to limit your impulses and find other ways to cover your payments. You may have a harder time dealing with your current debt if you add more to it with new credit cards.
How Can I Keep My Credit Score in Good Standing?
As mentioned above, your credit score can affect your ability to get out of debt in several ways. However, it’s possible to put your finances back on track by raising your credit score and obtaining more optimal interest rates on a debt consolidation loan if you qualify.
Take a look at some methods you can use to boost your credit score into a higher range:
- Pay Your Bills and Expenses on Time
- Keep Your Credit Utilization Rate as Low as Possible
- Limit Credit Applications
- Get Credit for Being Consistent with Your Monthly Bills
- Ask Your Landlord to Report Your Rent Payments to the Credit Bureaus
It’s important to note that improving your credit score isn’t necessarily a quick solution. The amount of time it takes to grow your credit will vary depending on the factors that kept it in a low standing. If you have poor credit because you don’t have a big credit history, it may only take a few months to enhance your score. But, if your credit is low because of missed payments, it can take longer to get your credit in a good position.
Other Factors that Impact Your Credit Score
Did you know that the length of your credit history makes up around 15% of how your FICO score is calculated? While it sounds minimal, it can significantly impact your credit score, which can consequently affect your debt. However, the influences of a credit history’s length can be both positive and negative. For example, having an open line of credit for an extended period can boost your score and increase your chances of getting approved for a new credit card. A bank or credit union may feel hesitant to approve you for a credit card if you have a low credit history because they can’t determine if you’re a responsible borrower.
On the other hand, closing a credit card account can decrease your score because it changes the length of your credit history and consequently increases your credit utilization. It’s understandable to want to close an account when you’re struggling with debt and want to reduce the amount you owe. However, the consequences of closing an account can lower your credit and ultimately disrupt your chances of getting a debt consolidation loan. To avoid this issue, it is important to not close old accounts unless it’s absolutely necessary. If you have to close an account, ensure you repay all your outstanding balances so you don’t have to deal with them later. It’s best to clear your remaining amount before closing an account since that will boost your credit score.
Conclusion – Be Mindful of Your Credit Score When Repaying Your Debt
Your credit score can significantly hinder your ability to get out of debt. If you’re maintaining a higher score, you can have the opportunity to apply for a debt consolidation loan and get your finances back on track. However, you may have to find other solutions like a secured loan to consolidate your debt if you have poor credit.
Stay on top of your credit and learn how to effectively manage your debt in order to avoid the issues that come with having a bad credit score. If you want to find tips on maintaining your credit score, you can always contact a financial advisor for guidance on what to do in your situation.