Does having too much credit card debt effect my credit score?
If you’re someone with a lot of credit card debt, odds are you understand only too well how that debt is effecting the rest of your finances. Even if you can afford the monthly payments, this high interest debt is eroding your ability to save money and build wealth. Unfortunately, this debt is hurting you in other ways besides your bottom line. Specifically, it could be lowering your credit score.
Computing a credit score is complicated. There are actually hundreds of different agencies an banks that compute credit scores, and nearly all of them keep the formulas they use private. This means that in order to figure out what effects your credit score, all we can really do is look at the actions other people have taken and work backwards to determine how their scores were effected.
How Credit Card Debt can effect My Credit Score
Based on this research, it seems that people with high levels of credit card debt tend to have lower credit scores, even when factors such as missed and late payments are factored in. The main reason for this is that a large part of your credit score is comprised of the ratio between the amount of debt owed and the amount of credit you have actually used.
People who have used up a lot of the credit that they have been extended (ie. they’ve maxed out their credit cards) are viewed as higher risk than those who have only used a small portion of the credit they have been extended. Banks tend to view people who are carrying high debt loads relative to their credit limit as a poor risk, and offer them higher interest rates.
Fortunately, there is a way to fix this even if you can’t pay off all of your debt within the next several payment cycles. A debt consolidation will pay off your revolving debt and replace it with a single fixed loan. Because the loan is for a fixed amount, your credit score will not be as effected by the loan (it doesn’t show up as part of this ratio). Once the cards are paid off, your credit used to credit extended ratio goes down, causing your credit score to go up. Paying off your cards also means that you no longer run the risk of making a late payment.