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Key takeaways

  • Proactively managing your debt is essential for maintaining a good credit score and financial health.
  • Monitor your score, use credit cards responsibly, and reduce your debt for the best results.
  • Implement tips to manage your debt effectively. Budgeting, repayment strategies, communicating with lenders, and paying more than the minimum can help you reduce your debt and improve your score.

If you don’t manage your debt wisely, your credit score can suffer. Your score is important not just for getting loans or credit cards but also when you want to rent an apartment or start a new job.

Lenders use your score to gauge your creditworthiness. Don’t manage your debt well, your score can plummet, making it harder to borrow with favorable interest rates or even pass certain employment screenings.

Understanding what will happen to your credit score if you do not manage your debt wisely is crucial for your financial well being. In this article, we’ll explore how to manage debt effectively and improve your score.

Credit: Do you understand it?

Before diving into the consequences of mismanaged debt, it’s essential to grasp what a credit score is and how it’s measured. Your score is a three-digit number representing how responsible you are for repaying debt. In other words how risky of a borrower you are. A lower credit score means you are high risk while a high score signifies low risk.

Here’s a breakdown of how scores are calculated:

Payment History (35%): On-time payments are the most influential factor. Missed or late payments can have a significant negative impact.

Credit Utilization (30%): Is how much you owe. It is the amount of available credit you are using. The lower the better.

Length of Credit History (15%): Is the length of time you’ve been using credit. The longer you’ve had accounts the better as it gives lenders more data on your borrowing behavior.

Credit Mix (10%): Lenders like to see a variety of accounts (e.g., cards, mortgages, installment loans) as it suggests you can handle different types of borrowing responsibly.

New Credit (10%): Opening several new accounts in a short period can negatively impact your score due to hard inquiries.

Understanding how your score is calculated is the first step toward improving it.

credit score calculation graph

Myth vs. truth: What affects your credit score?

When it comes to credit scores there’s plenty of misinformation floating around. Let’s debunk some common misconceptions:

Myth 1: Checking your report will lower your score.

False: Checking your report is a soft inquiry and will not lower it. It’s actually a good idea to check your report regularly for inaccuracies or fraudulent activity. Hard inquiries done by lenders are what lower your score.

Myth 2: You need to carry a balance on your card to improve your score.

False: Carrying a balance can potentially hurt your score. It increases your utilization and means you accrue interest, which can become expensive. It’s a waste of money to pay interest on a bill you can afford to pay off. Plus, paying your bill in full each month is the best thing you can do to improve your score.

Myth 3: Closing old accounts will improve your score.

False: Closing old accounts can actually hurt your score by shortening your credit history and increasing your utilization. It’s often better to keep older accounts open as long as they don’t charge annual fees.

Myth 4: Getting married will merge my score with my spouses.

False: Your score is unique to you. If you apply for a joint loan, say a mortgage, both your scores are taken into consideration. Payment history on only that loan will affect both your scores equally.

Myth 5: Making more money will boost your score.

False: Your income does not affect your score. It is not even on your credit report. Income is a measurement of your capacity to pay bills, not a reflection on your debt management.

Tips to use your credit card wisely and steer clear of debt

Credit cards are helpful tools to make major purchases or build your score. The problem is their convenience makes it easy to take on too much debt quickly. Let’s go over how you can use your card judiciously.

Spend within your means

The golden rule is to spend only what you can afford to pay back. It’s tempting to swipe for impulsive purchases, but doing so can quickly lead to unmanageable debt. Only purchase what you can afford and pay your bill in full each month.

Set up autopay

Timely payments are the best way to improve a poor score and avoid late fees. Most lenders let you set up automatic payments to ensure you never miss a due date. Even one late payment can have a significant impact.

Don’t max out your cards

Maxing out your cards classifies you as high risk. Keep your credit utilization ratio—the percentage of your credit limit you’re using – below 30%. A higher percentage makes it harder to repay your balance and leads to accumulating more interest.

Keep old accounts open

Tempting as it may be to close accounts you’re no longer using, don’t. This will shorten your credit history and lower your cumulative limit therefore increasing your utilization ratio.

Apply sparingly

True, the variety of accounts you have is a factor but a small one. Don’t take on debt if you don’t need to. Having too many cards can lead to overspending. Plus, any time you apply the lender will conduct a hard inquiry lowering your score.

Understand your card’s terms

Familiarize yourself with your card’s APR, fees, and rewards programs. Knowing the details can help you avoid unexpected charges and make the most of your card’s benefits.

Learn more about scores and what cards you can get on MoneyFor.

How to talk to your lender about debt

When it comes to talking to your lender, it’s important to be open and honest. They may be able to help you manage your debt wisely and find a solution that suits both parties.

Assess your finances: Take a deep breath and consider your financial situation. Understand how you got into debt and be prepared to discuss it with your lender.

Contact your lender: Reach out to your lender before your account is turned over to collections. Calling your lender to discuss your situation and explore options is key to avoiding long term negative consequences.

Prepare for the call: Consider what you can afford to pay and what you’d like to ask for. Potential options include a hardship plan, reduced interest rate or waived fees, debt settlement, or a structured repayment plan. A clear understanding of what you can offer demonstrates your commitment to resolving the issue.

Be honest and polite: When talking to your lender, be honest about your financial difficulties and explain what you are doing to get back on track. Avoid drama and focus on finding a solution.

Consider negotiating: You may be able to negotiate a lump-sum payment especially if you’re account is in default. Do note that a lump-sum payment can do serious damage to your score and remain on your report for up to seven years.

Read more about debt.

How do I begin paying off credit card debt?

Credit card debt can easily get out of control making it overwhelming to even begin paying off. Luckily there are strategies to help you get started. Here’s how to manage your credit card debt effectively:

Develop a plan

Take a look as your finances and see what you can pay. Write down your income, expenses, and track what you spend each month. Then decide where you can cut back so you can pay more towards your debts.

Find a repayment strategy

There are multiple repayment strategies. Two popular methods are the snowball and avalanche methods. The snowball method involves paying off the smallest balance first, while the avalanche method focuses on paying off the debt with the highest interest rate first. Choose the one that suits your finances and gives you the most motivation.

Pay more than the minimum

Always aim to make more than the minimum payment. This not only reduces the overall interest paid but also accelerates the repayment process.

Consider debt consolidation

Loans for debt management can be useful tools. They allow you to combine multiple debts into a single loan with a lower APR, simplifying your payments and saving you money on interest.

Negotiate with creditors

Don’t be afraid to reach out to your creditors to negotiate interest rates or ask for a modified payment plan. Many creditors are willing to work with consumers who are proactive about managing their bills.

Avoid taking on new debt

While you’re working to pay off your debts, it’s crucial to avoid borrowing money. Live within your means and only charge what you can afford to repay.

Seek professional help

If you’re struggling to manage your credit card debt on your own, consider consulting a nonprofit credit counseling agency. These organizations can offer personalized advice, help you develop a repayment plan, and even negotiate with creditors on your behalf.

Bottom Line

Managing personal debt is essential for your financial health. Not managing your debt wisely can cause your credit score to drop limiting your borrowing options. A lower score makes it difficult to secure loans with favorable interest rates, be approved for a new card, or get your dream job.

To avoid these consequences, implement our tips for managing credit card debt. Choose a repayment plan, consider a debt consolidation loan, or seek help from certified credit counselors. Managing your debt wisely can help you maintain a healthy credit score and achieve your financial goals. It is never too late to regain control and repay what you owe.

About the author

Rachel Alulis

Rachel Alulis has been the lead editor for Moneyfor’s credit cards team since 2015 and for the financial rewards team since 2023. Before joining Moneyfor, Rachel worked at USA Today and the Des Moines Register. She then established a successful freelance writing and editing business specializing in personal finance. Rachel holds a bachelor’s degree in journalism and an MBA.