Sneaky Ways Debt Could Affect Your Credit Score 

There are a lot of factors out there that can positively or negatively impact your credit score. That’s why it’s important to keep yourself updated on how your score is affected by your financial decisions. While understanding your credit score and where it stands currently may feel a bit overwhelming, this is a quick reference guide to help you understand what your credit score is, how it can change, and most importantly, how to use it to your advantage.  

What is a credit score? 

Before we dive right in, let’s take a moment to define what a credit score is. A credit score is a compilation of information from your credit report that helps financial institutions determine the level of risk you pose to them based on your past loan history.  

Credit scores do not include the following: 

• income information 

• personal identifying information like race, religion, gender, marital status, etc.  

• utility bill payments 

• bank account information 

Essentially, your credit score is a three-digit number that signals to others how likely you are to pay back borrowed money. This is helpful information for institutions, such as banks, who are assessing your credibility as a borrower for any potential lending opportunities.  

The types of debt that can impact your credit score 

Now that we know what our credit score is, we can take a closer look at how different kinds of debt, such as revolving credit and installment loans, may impact your credit score over time. 

Revolving credit 

Revolving credit allows you to borrow money and pay it back as you go and has a direct impact on your credit score. Credit cards are a prime example of revolving credit and can be a great tool to build your credit score. They can provide a long-term payment plan history, which can prove that you made reliable payments and have a good history of paying back the money you spent.  

However, credit cards can be a double-edged sword. They’re a great way to build your credit, but if you carry a certain percentage of a balance over from month-to-month, it can adversely affect your credit score. 

Lines of credit are dependent on how you use them monthly. Paying off the balance every month signals to the credit card issuer that you are able to pay on time. However, carrying a monthly balance can indicate that you can’t pay the balance, especially if your balance tips over 30% of your credit limit.  

Additionally, interest can start to build fast. When you pay off your credit card, no interest is added to the balance. But, if you carry over a balance, you also face the headache of added interest on top of that unpaid balance. Therefore, if you are in a situation where you need to carry a balance, it’s best to keep your balance under 30% of your credit limit.   

Ideally, paying off your credit card monthly is the best way to avoid a negative credit impact. Your credit card balance can have a large influence on your credit score, so it’s advisable to stay on top of paying back what you owe month-to-month.  

Installment loans 

Installment loans, such as auto loans, home loans, or other personal loans are considered “term loans.” This is a loan that’s provided to you in the full amount, so that you can purchase upfront, and pay the loan back in monthly installments over a fixed period. Installment loans are helpful when you want to purchase a car or home but don’t have the funds to cover the cost all at once. 

While revolving credit focuses on the balance you carry each month on your credit card, installment loans affect your score through a long-term payment history. 

For example, imagine that you decide to finance the purchase of a new car. You’ll be improving your credit score over time if you continue to make faithful monthly payments to the lender, and it can hurt your credit score if you don’t.  

It’s best to keep in mind that installment loans are focused on the long term, so if you were to pay off your car loan early, you may not see a credit boost immediately.  

How to check your credit score 

Firstly, there’s a misconception out there that checking your credit report negatively affects your score, but this simply isn’t always true. While the loan application process requires a comprehensive credit report, which can have a short-term negative impact on your overall score, checking your credit report online doesn’t have negative consequences.  

To check your credit score, you can explore the options your credit card or bank offers you, through the credit bureau websites, and through resources such as annualcreditreport.com. While checking your credit report is free, there are places where you may have to pay for additional access or services, such as credit monitoring.  

Checking for accuracy and potential fraud regularly protects you in the long run, especially when looking ahead to future loan options.  

How to freeze your credit 

One way to protect your credit score is to freeze your credit. It’s free of charge, helps protect against fraud, and can help you cut down on those impulse buys. If you don’t necessarily need your credit for a period, you can contact the three credit bureaus separately to put a freeze on your credit: 

• Equifax 

• Experian 

• TransUnion 

Freezing your credit means that if you or anyone else tries to apply for a loan, the lender will receive a “block” and won’t be able to move forward with the process. You’ll still be able to review your credit score online yourself, but you’ll just have to remember to unfreeze your credit the next time you want to apply for a loan.  

Final thoughts: using your credit score to your advantage 

Remember, you have much more control over the health of your credit score than you may think. Here are some tips to keep in your back pocket to that will help you to use your credit score to your advantage: 

• Avoid carrying excess balances on credit cards 

• If you have a loan, pay back your monthly payments on time 

• Familiarize yourself with your credit score by checking it online 

• Freeze your credit to help protect your report’s security and cut down on spontaneous purchases 

Whether you’re starting to seek out loan options for your next big purchase or simply want to get your credit score back on track, these are all actionable steps you can take to help provide peace of mind over your credit score.