Whether you’re currently in a debt management program and working to get your financial life back on track, or are simply curious about the ways you can improve your overall credit, you might be thinking about your credit score and the factors companies such as the Fair Isaac Corporation (FICO) use to determine it. While some factors, such as paying on time and keeping the amount you borrow on the low side, have a considerable impact, others have a smaller one. The different kinds of debt you have do influence your credit score, but according to FICO, the variety of debts you have make up just 10 percent of your total score.
The Type of Debt
Debt tends to be divided into categories such as “good” and “bad.” Typically, good debt is considered good because you can get something out of it. For example, if you have a student loan, you got some amount of education from it, or if you have a mortgage, you’ll end up owning a house when it’s paid off. In the case of debts that are generally thought of as “bad,” you don’t really get much from them. For example, using a credit card to buy consumables and only making minimum payments on the cards is generally considered bad debt, as it lingers long after you’ve used up the items and you end up paying more than they were worth. Having more good debt than bad debt is usually better for your financial health and stability.
When it comes to your credit score, though, the different kinds of debt aren’t so much good or bad as they are revolving, secured, or installment. Typically, FICO wants to see a fair mix of the different varieties of debt in your credit history, but it also doesn’t want you to open accounts or apply for loans you don’t use or need just to try to raise your score. What’s more important than having the different types of debt is making sure you are able to pay those you do have on time.
The Number of Debts
There’s also no magic number when it comes to how many debts are right to have. For example, having two credit cards, one mortgage, and one car loan won’t necessarily give you a perfect score, and having multiple credit cards, but no other types of debt, won’t necessarily tank your score. Instead, FICO or similar companies look at the big picture of your credit history. If you have two credit cards that you opened years apart, that will typically look better to a credit agency than applying for multiple new credit cards within a few month’s time.
A period of time when the number, type and age of debts you have does play a particularly big role in you score is if you are about to apply for a mortgage or another major loan. Usually, it’s recommended that you avoid opening new accounts in the months leading up to when you apply for the mortgage. Having one or a few new accounts opened around that time can drop your score low enough that you don’t qualify for the best interest rate or might be turned down altogether.
If you are concerned about the impact the types of debt you have are having on your credit score, talking to a credit counselor can help. We’re here to help you figure out what you can do about your current debts and to help you take the steps needed towards a brighter financial future.
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