How Credit Card Debt Can Tarnish Your Score
Author: Jenney Roberts
Credit card debt – How does it tarnish your credit score?
Hurting your credit rating is probably most similar to striking a match and burning all the money on your wallet. The concept is simple: bad credit score means higher interest rates and this means lower savings rate. The most common form of credit score, the FICO score ranges from the worst of 300 to the best score at 850 and this three-digit number is determined by various financial factors. Even if you’re a person who is diligent about maintaining your credit rating, few missteps like racking up credit card debt may hit your score in a bad way. Check out the ways in which credit card debt may hurt your credit score.
How is your credit score calculated?
The FICO credit score is calculated by taking into account various factors like:
- Your payment history
- The types of credit that you use
- The length of your credit history
- The amount of debt that you owe and
- Your new lines of credit
Most of us have multiple credit card accounts and when you can’t handle them together, you make the mistake of defaulting and this starts impacting your credit score. The more is the number of defaults on the credit cards, the closer you get to your credit utilization ratio, and the more will be the hurt on your score. Closing down credit card accounts without clearing off the balances is another mistake that most of us make and that hurts our credit score. Therefore, ensure paying off balances before you close a bank account to avoid the hit on your credit score.
Does your credit score drop if you settle your credit card debt?
When you acquire too much debt on your credit cards, it is most obvious that you’ll fall behind on the monthly payments due to lack of cash. If such is your situation and you want to settle your credit card debts, you have to think about the impact of this option on your credit score. As you’re not repaying your debts as per the credit card agreement, this will hurt your credit score. By settling your credit card debt, a portion of the debt will be waived off and you’ll be left with a reduced amount than what you actually owed. Since you’re actually not repaying the entire amount that you owe, you hurt your credit score. The better your credit score is before you settle your debts, the more will be the impact on your score.
Though you may often hear that some amount of credit card debt is required to boost your credit score, yet if you can’t keep your finances under control, acquiring debt is of no use. Carrying high credit card balance will adversely affect your credit score and therefore you should take steps to reduce your debt either on your own or through a credit card debt consolidation or a credit counseling agency. Also manage your finances and restrict the usage of your cards so that don’t keep on racking up debt.