When opening a line of credit, you are taking on a financial responsibility to borrow money that you intend to pay back. A credit card can have a positive or negative effect on your credit score depending on how you use it.
If you are not careful, you may be on the fast track to accumulating high credit card debt that can lower your score. However, this means that you can increase your credit score. Even if you have less-than-perfect credit, you can improve your score as long as you stay within the limits of your credit card.
Credit card debt is a prime example of revolving debt, and this type of debt can harm your score.
Learn how revolving debt impacts your credit score and how you can prevent its negative effects.
Revolving Debt Is Risky
Each month, you must pay off credit card debt with timely payments to avoid interest charges. If you can’t pay off the full amount, the balance carries on month-to-month. This is referred to as revolving debt. This type of debt accrues interest, meaning interest charges will be higher until you pay off the remaining balance.
Agencies consider credit card debt as a dependable factor in assessing your risk as a borrower. As long as you make on-time payments, your payment history will improve your creditworthiness.
Credit Utilization Rates Matter
Credit scores are largely determined by your credit utilization rate. This ratio measures the amount of credit card debt you owe in relation to your credit limit. This rate calculates how much your card is used. Frequent utilization can make your ratio high. It indicates overspending, which negatively impacts your score. The general rule for credit utilization rates is to stay below 30%. However, the lower the number, the better.
Ratios higher than 30% can lower your credit score and lead lenders to believe that you may have difficulty repaying new debt. Help your credit score by maintaining a lower credit utilization rate each month.
New Credit & Credit Mix
Despite its negative effects, credit card debt can increase your credit score if managed properly. How? Having different types of debt can diversify and improve your borrower profile.The number of active revolving accounts and their age impacts part of your credit utilization rate. Owning older accounts can help your score, as they display a stable history of managing credit.
On the other hand, having many accounts and opening new accounts can diminish your creditworthiness. Ensure that you are managing your revolving credit debt accounts responsibly to prevent negative impacts on your credit score.
Lendah can help reduce credit card debt and improve your credit score with a debt consolidation loan. Through a network of over 30 lenders, we find loan options that fit your budget and keep you on track to becoming debt-free.
If you have questions about debt consolidation loans, speak to our team of knowledgeable professionals. Our compassionate loan matchmakers will find the best terms tailored to your unique situation with fast approval and rates starting as low as 3.84% for amounts up to $100,000.
Get started today on our website. Prefer to talk in person? Call us at 833-453-6324, and we’ll get you connected immediately with one of our loan experts.