How Does Your Debt Impact Your Credit Reports & Credit Scores?

For many of us, debt plays a big part in our lives. Some of us take on mortgage debt to buy our homes. Others take on student loan debt to get an education. And many wind up with credit card debt to pay for day-to-day items or for big splurges. Debt in and of itself isn’t a bad thing. Your debt accounts are what make up our credit reports, and how you manage them can play a huge role in what your credit scores look like.

High student loan payments, for example, can sometimes result in you falling behind and making a late payment. That late payment goes on your credit report (see image below), which then negatively affects your scores. And the more often it happens, the worse your credit scores can be.

Example Credit Report from Experian

Likewise, large amounts of credit card debt can bring down your credit scores, especially if you’ve had any late payments. Why does that matter? Well, the more negative items on your credit reports, the lower your credit scores will be, meaning it will be that much harder to get new lines of credit, such as auto and mortgage loans. Low credit scores can also mean higher interest rates on the loans you do manage to take out.

Let’s take a look at how all of this works.


What Makes Up Your Credit Score?

Before we can really go into how debt impacts your credit reports and scores, we need to understand fully what a credit report is and what makes up your credit scores. First of all, a credit report is very simply a history of your debt accounts. It includes the name of the lending institution, the date your account was opened, your timely payments, any late payments and other identifying data. This information is compiled by the three major credit reporting bureaus — Experian, Equifax and TransUnion — and the data is used to calculate your credit scores.

There are a lot of different credit scores available today, but many credit scores still are made up of the following factors and weighting:


Payment History (35%)

The biggest and most important piece of your credit score is your payment history, or your ability to make payments on time. This is what helps creditors assess your ability to pay back a debt. Both revolving debt (credit cards) and installment debt (mortgages or auto loans) impact this category.


Amounts Owed (30%)

The next largest piece of your credit score is the total amount owed, or your credit utilization. The objective is to keep the amount of available credit you use as low as possible (preferably below 30% of your total available credit, but more on that later). If you are constantly using up your total available credit, it’s likely you’re going to look like a risky borrower to most creditors.


Length of Credit History (15%)

Have you had credit accounts opened for a long period of time? If so, you will score well in this category. While it makes up a smaller portion of your credit score than your payment history or credit utilization, it’s easy to keep this score high by maintaining long, healthy credit relationships.


Types of Credit (10%)

This category isn’t weighted very heavily, but your credit score also considers the different types of credit accounts that you have open. It tends to be more beneficial having multiple types of accounts (credit cards, retail cards, auto loans, mortgages) rather than just a single type.


New Credit (10%)

Creditors like to see a steady addition of credit accounts. They would prefer to see you take out something new every year than apply for three new credit cards in a month. Opening several new accounts in a short period of time can come off as a potential credit risk. The risk increases if you have little past credit history.


Your Debt and Your Credit Scores

Now that we have explored what makes up a person’s credit score, we can look a little deeper into how debt can affect it. The two biggest pieces of your credit score, payment history and amounts owed, are directly related to debt. Frequently when people ask “does credit card debt hurt my credit score?” these are the things they should consider.

Do you find yourself struggling to pay your bills on time? Are you constantly more than 30 days late on your credit card or mortgage payments? These are the types of things that get reported to the credit agencies and can have a significant impact on your credit score. To put this into perspective, someone with a 780 credit score could see a 90 to 110 point drop in their score if they are 30 days late on just one payment. It’s also going to stay on their credit report for the next seven years. That one payment can have a significant affect on your financial life.

Why does that matter? Take a look at the chart to the left from to see just how much your credit score can impact what kinds of interest rates you can get based on your credit scores.

Making payments on time is only one piece of the puzzle. It’s also crucial to pay attention to how much of your revolving credit is being used. Ideally, each month you want to see a 0% credit utilization. That means paying off your balances on your revolving accounts every single month. Of course, for many people this doesn’t happen. (If that’s you, here are some helpful tips on how to pay off your debt once and for all.) That being said, having a credit utilization of less than 30% is ideal. Once you start creeping over 30%, you will start noticing a negative change in your credit score.

The combination of making sure you pay your balances on time, even if it’s the minimum, and making sure you’re not maxing out credit cards, can go a long way to keeping a good credit score.

Handling Out-of-Control Debt

Being in debt can be stressful. It can make you feel trapped and confused, but it’s important to understand that you have options.

If your debt has you thinking about debt settlement or even bankruptcy, it could have a dramatic and long-lasting effect on your credit scores. Bankruptcies can stay on your credit report for up to 10 years and can lower your scores considerably.

Another solution that many turn to is debt consolidation. But before you go this direction, know that debt consolidation also can negatively impact your credit scores, but not nearly as much as some of the other options.

“Opening up a new debt consolidation loan also impacts credit scores through the ‘length of credit history’ factor, which accounts for 15% of credit scores,” says Freddie Huynh, vice president of credit risk analytics with Freedom Financial Network.

“When a debt consolidation loan shifts a person’s outstanding credit card debt onto a newly opened installment loan, this typically lowers the credit card utilization for the consumer,” Huynh went on to say. “Though there are other predictors that assess indebtedness of installment loans, credit card debt is generally most influential in credit scores. As such, this can produce a positive impact on a credit score. Again, in order for consumers to benefit  from this change long-term, they would need to resist the temptation to re-leverage and ramp up their credit card balances again.”

So while there might be some short-term negative impacts to debt consolidation, the end result should be positive.


Minimizing the Effects of Debt on Your Credit Scores

While your debt can have a major negative impact on your credit scores, there are ways to minimize the damage. As a starting point, it’s important that you make sure you are always paying your bills on time. Even if you can’t pay them in full each month, you should be paying the minimum. Keep in mind that while you won’t be able to reverse the effects of a missed payment, they will weigh less on your scores as more time passes.

It’s also wise to keep your revolving balances as low as possible. By doing this you will lower your credit utilization. This tends to be one of the easiest ways to boost your credit score. If decreasing balances isn’t an option for you at the moment, then you can request an increase in your credit limit. Both will have similar end results.


[Editorial Disclosure: is a service that provides people with tools to pay down their debts through automatic payments. The purpose of this article, however, is not to encourage users to purchase that service. This article is educational and journalistic in nature and aims to help people learn how to pay down their debt, whether they use our site, another, or go it alone.]