Staying informed about your credit score is important. You can easily track your debt while ensuring your financial information is always safe. However, understanding your credit score and how it can change can be confusing. 

Misinformation and a lack of education regarding financial literacy can significantly impact your debt management abilities. For example, you might think only your credit card activity determines your credit score. However, your credit score is more than that; your debt accounts for 30% of your credit score.

Having a little bit of debt history is fine, as it lets lenders know whether you pay back what you owe. This also establishes that you were approved for some credit at some point. It is difficult to get more substantial loans and credit amounts for large purchases without an established debt pattern. 

The critical thing to remember about debt is that there is no problem having it, but there needs to be an effort made to pay down your debt.

You do not want the debt just sitting there collecting interest. Failure to pay will affect your credit score in a bad way, no matter where the debt came from. 

Different types of debt can affect your credit score. Understanding these types of debt and how they relate to your financial situation can ensure you take the proper steps to manage your debt and improve your credit score. 

Loans 

Regardless of where you get it from, a loan will show on your credit score. A loan may be taken for a few reasons. First, it is considered installment debt, as you take a large sum and pay it off in small payments. Typically, there will be a minimum amount you have to pay against your principal each month. 

Interest will also be charged on the amount you owe back for your loan. For most loans, there is a fixed percentage of interest. Your credit history is one of the factors that will determine how much interest you must pay. Furthermore, it determines your approval for a loan. 

Car Loan and Mortgages

Interest rates are usually lower for car loans or a mortgage because the lender has less risk. For example, if you were to miss any payments or fail to pay your auto loan or mortgage, the lender would take back the property. 

Other Types of Loans

For loans such as a student loan or a personal loan, there is nothing that the lender can take from you to pay themselves back. Therefore, giving you this loan is more of a risk for the lender. This is partially why the lender will review your credit history and potentially give you a higher interest rate. 

How Loans Affect Your Credit Score

If you make your monthly payments on time towards your loan, it will positively affect your credit score. In addition, these payments show that you are responsible with your debt and actively have the funds to pay towards your debt. 

Missing a payment once or twice most likely will not hurt your score, provided you try to make up the payment as soon as possible. However, making a habit of missing payments or making late payments can impact your credit score. This is because the company or financial institution you owe money to will report missed payments on your credit history. Your score goes down when this happens. 

When it comes to getting a loan in the future, if you have a history of missed payments that you do not try to make up or you default on a loan, you run the risk of getting denied. 

Charge Cards

Charge cards are not as common as they used to be. They are also much harder to get than other types of credit. A charge card will let you make purchases that you pay for in monthly increments. They will usually have a limit, but that limit can fluctuate. 

The debt that you incur on a charge card is considered unsecured, which means it is a high risk for lenders to approve you for these. They can also have higher interest rates than other types of credit and penalties if you fail to pay your monthly amount on time. 

Medical Bills 

Depending on where you live and if you have any insurance, it is possible to garner medical debt in the case of medical necessity. If you cannot pay your medical debt off right away, you can potentially arrange a payment plan that splits up payments into smaller increments. Click the link below to learn more.

https://www.cnbc.com/select/how-long-does-medical-debt-stay-on-your-credit-report/

If you miss payments towards your medical debt, the medical facility may turn that debt over to a collection agency. If it gets that far, it could have a significant impact on your credit score. You would have to be dormant on payments for quite some time before that happens. 

Furthermore, when medical debt is turned over to a collection agency, there is often a waiting period between when it is turned over and when it shows up on your credit report. Because of how these debts are incurred, it allows you to have more time to set up a payment arrangement that works.

Debt Consolidation

Many banks or financial institutions offer debt consolidation loans. These loans essentially allow you to pay off multiple types of debt.

Once those debts are paid, you will then owe the consolidating lender. These loans work like most loans, where you have a monthly payment plus interest and a fixed term to pay it back in. 

While this can be an excellent option for getting a good handle on debt, doing so can have a small impact on your credit score. It affects your credit score because a credit report will need to be pulled to determine whether you are eligible for one. 

It also affects your credit score because you reduce your credit utilization. Utilization is how much credit you have available versus what you are using. 

The only solution for those in an unmanageable financial solution might be filing a consumer proposal or bankruptcy. It could be a necessary solution for your financial situation, but it will lower your credit score substantially. Thankfully, once you manage your debt, there are many ways to build it back up smartly. 

Bills 

When you purchase items like a cell phone or internet plan, you may not realize that your credit score is checked before being approved for these items. It happens because the issuer wants to know you can pay your bills. 

If you fail to pay these bills, the issuer will submit this history to your credit report. Once again, a more extended history of missed payments will be sent to a collection agency. Alternatively, a propensity for paying your bills in full and on time is excellent for your credit score. 

Opening and Closing Accounts Frequently 

It may be tempting to switch credit cards every time a good offer or incentive comes up. Therefore, it may seem smart to close an old card, so you do not have multiple that you’re tempted to use it.

However, having old cards or accounts open and showing a history of on-time payments on your credit report is good. 

When you continuously open new accounts or take on new loans, your credit score will reduce your credit age. In addition, the frequency of credit inquiries that will show on your report will also affect your score. To lenders, all this new activity will look a little dodgy to them. They may think you’re at high risk of mismanaging your debt. 

Having a few different types of credit opened, such as a credit card and a couple of loans, is good. This will tell potential lenders that you can handle multiple types of debt. Thus, they may not be as wary when it comes to lending to you. However, this is not to be incentivized to take on more debt than you can manage. 

Once again, being cognizant of your credit and your debt is essential to improving your financial situation. In addition, it can help you prioritize how you allocate your budget towards different types of debt. Finally, this awareness and some budgeting efforts on your end can help you improve your credit score.