What Adding On and Paying Off Debt Does To Your Credit Score

Of all the financial numbers to be aware of, your credit score is arguably one of the most important. Several factors determine your credit score, and how you utilize various lines of credit can significantly impact your score. Take, for example, a credit card: it can be a handy financial tool, but it’s important that you keep up with the payment terms associated with your card. Balances can snowball, and it’s essential to make payments on time and, ideally, pay more than the minimum monthly payment. Staying in good standing with creditors is a great way to build up a high credit score.

What if I paid down some of my debt?

In general, you should always strive to pay down your balances to reduce the amount of interest you pay every month and bring yourself closer and closer to financial freedom. In most cases, paying down balances will also help your credit score—but in certain cases, it might actually hurt it! For example:

Paying off a car loan.

While credit cards are revolving debts with no predetermined end date,  car loans are installment loans where you pay a monthly amount over a set period of time. Lenders like to see that you can handle a variety of different types of debt, so if you paid off your car loan and it was your only installment loan, leaving you with only revolving debts (i.e. credit cards), then paying off that car loan could actually lower your credit score. 

Paying off and closing a credit card.

We’re not saying you shouldn’t pay off your credit cards, though—if you can, go for it! However, try to keep those accounts open once you’ve achieved that goal—it could end up hurting your credit score if you close your account once the balance has been paid. One key factor in your credit score is your credit utilization ratio. Your credit utilization ratio is the amount of credit you have available compared to the amount of credit you’ve used. If possible, it’s a good idea to have multiple, diverse lines of credit in order to strengthen your credit utilization ratio. In general, having a ratio of no more than 30% is good for your credit score—this kind of ratio proves to credit bureaus that lenders feel confident lending to you and that you can handle credit responsibly. 

Lenders also consider the average credit balance across all your accounts. If the credit card account you closed had a low balance, then your average credit balance would likely increase,which may in turn lower your credit score. So, if you pay off a credit card, it’s probably a smart move to keep the account open with a zero balance (you could even cut up the physical card so you’re not tempted to use it!).

What if I added on debt?

It may seem counterintuitive, but adding on debt may actually help your credit score! But tread carefully—there are some things to consider before you go applying for a bunch of new lines of credit:

Adding a new credit card account with a low credit balance.

If you open a new credit account and keep the credit balance on that account below your average balance, then lenders will see your average credit balance decline. This will likely improve your credit score, especially if the new credit account has a high credit limit. By taking on debt but keeping your credit utilization ratio low, you could increase your credit score.

Adding an installment loan.

Let’s say you have no installment loans, and you open a new one, like a car loan or mortgage. In this case lenders will see that your credit sources have diversified, which may help your credit score. 

However, adding on debt in such a way that increases your average credit balance or credit utilization will likely hurt your credit and lower your credit score, so again—be mindful of how you take on new debt! 

What if I can’t make my payments?

One way to maintain your credit score is paying at least your minimum monthly payment on time every month. If you’re ever in a situation where paying on time or meeting the monthly minimum payment is impossible, it can take a toll on your financial health. With each missed payment, your credit score will start to drop and will cost you more money over time as interest fees accrue. 

Where can I find help?

If you find yourself only able to make your minimum payments month after month, it can feel like trying to swim up river against a strong current—barely making any progress on paying down your balances. However, there’s hope: debt settlement could help you get your finances back on track. 

While debt settlement will lower your credit score initially, the right partner can help you rebuild it over time. Debt settlement companies like ACCS can help you pay off your balances faster and set up an affordable monthly debt repayment plan. The experts at ACCS handle the negotiations with your creditors for you, and can often negotiate a settlement rate lower than your original balance. They also provide guidance to help you rebuild your credit score after your debt is paid off. 

Request a custom debt relief plan today to see how ACCS can help relieve your financial stress and get you to the credit score you want. 

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