Lowering Debt Can Raise Your Credit Score

Credit scores affect everything from the interest rates you pay when you borrow money to whether you can rent an apartment or get a job. Obviously then, it is important to know how credit scores work and how high-interest debt can affect your credit score. However, a recent survey by Consumer Federation of America and VantageScore Solutions found that most Americans do not know what a strong score is and do not understand the financial cost of a poor score.

Credit Score Basics

Your credit score is a number lenders use to help them decide how likely it is that they will be repaid on time if they give you a loan or a credit card. This credit score is built on your credit history. The score is based on several factors, including your total debt, the types of accounts you have, the number of late payments you have made, and the age of your accounts.

Having a lower credit score means you will end up paying higher interest rates on all your consumer and mortgage loans. For example, on a $20,000, 60-month auto loan, you can pay up to $5,000 more in interest with a bad score than a good one. A low credit score can also make it harder to rent an apartment, get utility services, and even get a job.

Debt Can Affect Your Credit Score and Financial Health

Borrowing more money than you can afford, particularly through high-cost loans, is one of the quickest ways to lower your credit score. That makes the results of a recent national survey by America Saves and Experian particularly troubling. The survey revealed that a surprisingly high percentage of Americans (16 percent) have very expensive payday, car title, or pawnshop loans.

Not surprisingly, the survey found that individuals with these sorts of high-cost consumer debt were more likely to have difficulty saving. They also pay a high personal price. People with lots of debt often say they lack peace of mind. They worry constantly about paying off debts and making ends meet. The stress of these worries affects their family life, work performance, and other areas of their lives.

Improve Your Score and Get Help

  • There are a few ways to improve your credit score:
  • Minimize outstanding debt.
  • Pay your bills on time.
  • Keep balances low on credit cards and other "revolving credit."
  • Apply for and open new credit accounts only as needed.
  • Pay off debt rather than moving it around.
  • Regularly check your credit reports, which can be obtained for free, to make sure they are error-free. Federal law requires the three main credit bureaus -- Experian, Equifax, and TransUnion -- to make available to consumers, upon request and at no charge, one credit report per year at www.annualcreditreport.com.

In most communities, there are agencies that can help you manage your debts. The most helpful and most widely available are non-profit Consumer Credit Counseling Services (CCCS). CCCS counselors can work with you privately to help you develop a budget, figure out your options, and negotiate with creditors to repay your debts. Call 1-800-388-2227 to locate the office nearest you.

Paying off debt helps you lower your credit score and will let you start saving.

Test your knowledge about the credit score market at Creditscorequiz.org.

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