Debt isn’t always a bad thing. In fact, you need some debt if you want to accumulate a credit score. You need a payment history that shows lenders and the credit bureau that you can effectively handle your finances.
Unfortunately, not all debt is equal, though. For example, if you have a ton of credit card debt on your credit report, that’s not a good thing. But if you have a good mix of credit card debt and installment debt, all with a good payment history, you could be in good shape.
Keep reading to learn which debts affect your credit the least and which may have the most damaging effects.
Revolving credit or credit cards have an effect on your credit score, but it’s not always negative. Now if you go out and max out your credit card, yes it will negatively affect your credit score. But if you use your credit card responsibly, only charging a small amount of your available credit line, it may not hurt your credit score at all.
What you need to watch with credit cards is the utilization rate. The credit bureaus compare your total available credit line to the amount of outstanding credit. If you have more than 30% of your available credit line outstanding, it can negatively affect your credit score. On the other hand, if you have less than 30% outstanding and you pay your bills on time, it can give you a positive payment history that can help your credit score.
Installment loans don’t have the same effect on your credit score. In fact, they typically have very little effect. You may see a change in your credit score when you first take an installment loan out just because of the money you borrowed, but that effect wears off quickly.
What you won’t see is a dramatic change in your credit score when you pay the installment loan off in full. That’s because installment loans are typically secured by an asset, such as a house or a car. This makes installment loans more predictable. If you had the choice between paying your credit card on time or your installment loan on time, you’d probably choose the installment loan so that you didn’t risk losing your house or car.
Because of an installment loan’s predictability, it doesn’t affect credit scores as much as you might think. Your main focus with an installment loan should be to make your payments on time because a late payment on any type of loan can have a detrimental effect on your credit score.
It’s an unfortunate fact that many people have medical debt. Normally, medical debt doesn’t get reported to the credit bureaus. It’s once you don’t pay your bills though, that the medical practice sends the bills to collection agencies. Typically, collection agencies report their debts to the credit bureaus.
Typically, medical debt doesn’t affect your credit score a lot, especially if it’s a small collection. But in the grand scheme of things, a collection is a collection and that’s not a good thing. A sizeable collection could damage your credit score significantly, which could make it hard for you to get any other loans.
Judgments are worse than collections and affect your credit score accordingly. A judgment can affect your credit score from the minute it’s reported on your credit report until the statute of limitations kicks in and it’s removed from your credit report.
The best thing you can do is avoid any debts turning into judgments so that you don’t have to see the impact they can have on your credit score. If you do end up with one, pay it in full as soon as you can. You should also make sure that you keep the rest of your credit history as positive as possible. This means paying all of your other debts on time and not overextending yourself. This way you can ensure that the judgment doesn’t have the negative effect it has the potential to have.
Overall, your best bet is to pay your bills on time, only borrow what you need to borrow, and keep your revolving debt under control. If things get out of control, reel them back in as fast as you can by paying your debts down and avoiding taking out any new debt.