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Debt and Your Credit Score

Oct 13, 2007
Many consumers do not understand the impact that debt has on their credit score. Further, they do not understand the various actions that can affect their score. Some of these debt actions may seem innocuous, but can have far reaching repercussions to the unwary consumer. This article will look into a few of the ways that debt and your credit score are linked.

The most obvious way that debt and a credit score are linked is when the consumer fails to make timely payments. As debt mounts, paying the bills on time can become harder and harder and a few bills may end up being paid late or not at all. If a bill is over 60 days late, it is likely to be reported to the credit agencies and will, ultimately, affect your credit score.

Another issue with debt and credit score is the level of debt that a consumer has on file. Your credit score is based on a many factors and one of the most important is the debt-to-income ratio. Even if you are paying all of your bills on time, if the percentage of debt that you have reaches a certain level as compared to your income, red flags go up at the lender's office. In other words, the more money that is required in order to pay your current bills means the less money you will have on hand to pay future loan bills should the lender approve your loan application for any new loans.

The debt-to-income ratio cut off level varies from lender to lender and from loan type to loan type. An application for a home loan would almost certainly have a lower ratio cut off number than a loan request for an automobile. The best way to counter this is to pay off your debts in a timely manner. This can be especially true if you want to apply for a home loan.

Something that many consumers do not know is that many times a credit score can be affected by loan applications themselves. Whenever a person applies for a loan, and this includes credit card applications, that request for credit is logged into the credit report. If a lender sees too many of these applications being generated within a short period of time, that, too, brings up the red flags. The odd part about this is that the applications do not need to have been approved in order for this to look bad on your report. The simple fact that you submitted the applications (in those high numbers) is all that is needed to, perhaps, have a negative turn on future credit.

The way to counter this is to not submit frivolous credit applications, especially those credit card applications that swamp most mailboxes, unless you truly need and want that a particular credit line with a particular credit company. Be selective in your choices and this will all but eliminate this potential problem.

Lastly, the time to worry about debt and credit score problems is before they become problems. If you see any indication that you are heading for financial troubles, take action to head it off. Keep in mind that some credit issues can stay on your credit record for up to seven years, and will lower your credit score during that entire time.
About the Author
Peter Kenny is a writer for The Thrifty Scot, please visit us at Debt Advice and Credit Report
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