by Kyle Murray

If you are like many consumers, you have probably learned to live with debt. Maybe you have a car loan or a mortgage, or are carrying a balance on one or more credit cards. In fact, credit card debt is some of the most common debt among consumers, and it’s on the rise. The average American family owed over $8,000 in credit card debt in 2016, up 6 percent from 2015, according to data from WalletHub.

Even if your credit card balance is lower than the national average, it’s worth doing a reality check. If you have any debt at all it can hurt your credit score, so you should know what you can do about it.

The advantages and disadvantages of credit cards

The more debt you have, the more money you owe and the greater the financial burden you may feel. Paying for recurring bills and everyday necessities is much harder when a significant portion of your monthly income has to go toward debt payments.

Many consumers who are feeling the pinch make the mistake of making late payments or missing payments altogether. However, these are some of the worst things you can do when it comes to your credit score. Since the largest percentage of your credit score is attributed to your payment history, even one missed or late payment can negatively impact your score. On the other hand, making your monthly payments on time, every time, creates a positive payment history. The better your payment history, the more points you can earn on your credit score.

Sometimes your good payment history and credit score aren’t enough. When applying for a new loan, many lenders will look at your total debt to determine if you can afford the monthly payment. If you already owe a large amount of debt in credit cards or other loans, what’s left in your bank account after making those payments may not cover the new loan. The bottom line is that too much debt can disqualify you for a loan, no matter how good your credit is otherwise.

When looking at your debt, it’s also important to take into account your credit utilization ratio. This ratio is determined by the amount of credit card debt you owe in relation to your available credit. It’s a good idea to use as little of your available credit as possible — experts say 30 percent or less — if you don’t want to hurt your credit score.

Keeping your ratio low may be one instance when having more than one credit card is an advantage. Multiple lines of credit raises the total amount of credit available to you and helps you show less debt overall, relatively speaking. But don’t get another credit card if you’re already struggling to keep up with payments on your existing debt.

Debt collections

Let’s say that despite your best intentions you ended up in debt trouble. Maybe you were delinquent on your debt payments, or your account was mistakenly marked as delinquent. Now a collections agency may be trying to collect payment from you.

With your account in collections, you could see a steep drop in your credit score. How many points you lose is dependent on the amount being collected, the type of debt and your current score. For example, your credit score may not suffer much if the amount being collected is small, say less than $100. Also, some credit reporting agencies may use credit models that soften the impact on your credit score if your debt is medical vs. non-medical. However, be forewarned: if your credit score was high at the outset of the collection, you could lose more points than if you had a low score.

It’s hard to avoid your credit being hurt in a collections situation. But there are some things you can do and think about to help mitigate the damage:

● When your account is in collections, it’s important to keep up with all your other debt payments to avoid doing further damage to your credit. You may still be denied new credit cards or loans if your collection is recent or the collection remains unpaid.

● You may want to consider negotiating and settling with the collections agency. In some cases, debt settlement companies may advise you to purposely make late payments so that a creditor will be more likely to settle. But as we’ve already discussed, any late payments will hurt your credit score and could compound the problem. When it comes to debt settlement, it’s best to approach it with your eyes wide open and make sure it’s the right action for you.

● While “paid in full” is the most desirable for your credit score, a “settled” note on your account is better than “unpaid.” Debt settlement remains on your credit report for seven years. As you continue to show on-time payment and other positive financial behaviors, the settlement will have less of an impact on your score over time.

● If your delinquency is inaccurate, be sure to report the mistake to the credit bureaus. Agencies like the Consumer Financial Protection Bureau can advise you on how to dispute the error, the information to include and the best ways to follow up. It’s always wise to review your credit report and take measures to protect your credit score.

● No matter what, the goal is to get rid of your debt. A collection and settlement on your record will have an adverse impact on your credit score in the near term. But it’s better to pay off your debt first before worrying about anything else. Remember: rebuilding your credit is essential to being able to qualify for future loans.

Debt is a reality for many people. Without a clear understanding of its potential effects on your financial well-being, you could find yourself with too much debt, unpaid bills and damaged credit. Consider professional credit repair services if you are struggling with errors on your credit report. The experts can help review, clean up and secure your credit for a better financial future.

CreditRepair.com Empowers Every Individual To Achieve The Credit Scores They Deserve & Enjoy A Lifestyle Of Greater Opportunity.

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