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How to Manage Debt and Improve Your Credit Score

How Does Debt Affect Your Credit Score?

Debt can significantly impact your credit score, especially if not managed wisely. Late payments, high balances, and excessive credit applications can lower your score. Conversely, using credit cards strategically and maintaining manageable installment debt can improve your credit. It’s crucial to balance using debt to your advantage while preventing it from becoming overwhelming.

Good Debt vs. Bad Debt

Not all debt is created equal. “Good debt” includes mortgages, car loans, and federal student loans, which can help build wealth, provide reliable transportation, and enhance your skills. “Bad debt” includes high-interest credit card debt, payday loans, and car title loans, which can lead to financial strain and high credit utilization rates.

How to Manage Debt

Managing debt effectively can strengthen your credit score. Here are some tips:

Set up Autopay

Ensure timely payments by setting up automatic payments from your bank account for all credit card and loan accounts. This helps avoid late payments and overdrafts.

Pay Off Credit Cards Each Month

Keep your credit card usage below 30% of your credit limit, ideally under 10%. Pay off your balance in full each billing cycle to avoid interest charges and growing balances.

Seek Help Before You Miss a Payment

If you anticipate missing a payment, contact your lender or issuer. They may offer solutions like forbearance or hardship plans to help you avoid late payments.

How to Improve Your Credit Score

To further enhance your credit score, consider these steps:

Apply for a Secured Credit Card

A secured credit card requires a refundable cash deposit and can help build credit for those new to credit or looking to improve their score.

Apply for a Credit-Builder Loan

This installment loan helps build credit as you make payments, which are reported to credit bureaus. The balance becomes available as a savings account at the end of the term.

Keep Your Oldest Credit Card Open

Even if you don’t use your oldest card, its age can benefit your credit score. Consider using it for small recurring purchases or switching to a different card with the same issuer.

Limit New Credit Applications

Only apply for new credit when necessary. Too many applications can negatively impact your credit score.

Frequently Asked Questions

Should I Pay off My Credit Card Balance in Full or Over Time?

Paying off your balance in full each month is ideal to avoid interest charges and maintain a low credit utilization rate.

Why Does My Credit Score Go Down When I Pay Off Debt?

Paying off debt can temporarily lower your score if it changes your credit mix or reduces the age of your credit accounts.

What Is a Good Credit Score?

A good credit score typically ranges from 670 to 739, while a score of 740 or higher is considered excellent.

The Bottom Line

Managing debt strategically is essential for maintaining a good credit score. Keep credit card balances low, pay off your total balance monthly, and only take out loans you can repay. Additionally, maintain a solid credit mix and keep your oldest credit card accounts open if possible. Your credit score is a vital part of your financial life, and managing debt wisely is key to keeping it strong.

For any mortgage service needs, contact O1ne Mortgage at 213-732-3074. Our team is here to help you navigate your financial journey with expert advice and personalized service.

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