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How the Amount of Debt You Have Affects Your Credit Score

If I said it once, I've said it a thousand times; credit card debt isn't the enemy, your spending habits are.

Your credit utilization rate is the second highest factor in your total credit score calculation. It accounts for 30 percent of your total score. It's only second to your payment history which is a whopping 35 percent of your total score. Knowing this, the two most important factors to keep your credit healthy is avoid overuse on your credit cards and to pay your bills on time.

Do I overuse my credit cards?

Your total amount of credit card debt should always be under 30 percent utilization. What does this look like? If your credit limit on your credit card is $ 1,000, your credit balance should never go over $ 300. Going over 30 percent utilization can have serious implications on your credit score. How much? From a personal experience, my credit score dropped over 30 points. I was at 32% utilization because of an emergency and when I was able to pay it down to 28 percent, my score was restored and went up 32 points.

If you're in debt up to your eyeballs, it could affect more than just peace of mind and your credit score. It could actually cost you more money. Creditors may not lend to you if you're consistently nearing your limit on your credit cards. You're considered high-risk because you're spending more than you make. If a creditor does lend money to you, you might be saddled with a high interest rate on you credit account.

How can I fix it?

Overuse of credit accounts is part of a larger problem than 30-ish points on your credit score. It's a symptom of poor spending habits, which can be costly and frustrating as time goes on. Building debt has never served anyone. It's imperative to start building healthy spending habits if you've noticed that you're consistently going over 30 percent utilization.

The first thing you should do is pay down your debt to under 30 percent utilization. Make a plan, put together a budget, and stick to it. Make the distinction between wants versus needs.

Once your debt is under 30 percent utilization, make sure not to go over 30 percent. While it might be uncomfortable to change your spending habits, the long-term effects will give you more peace of mind, a higher credit score, and the ability to secure a healthier financial future.

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