If you have any type of debt — car payments, a mortgage, student loans or credit cards — you’re not alone. The latest findings from the New York Federal Reserve indicate that U.S. consumer debt has reached $13.86 trillion. Auto loans make up $1.3 trillion of that amount, a $59 billion jump from last year, according to the Federal Reserve.
The amount of debt you accumulate over time impacts your credit history. While making on-time payments is a good way to improve your credit, reducing the amount of debt you owe can help as well.
How does debt affect my credit?
According to Experian, credit-scoring models consider your credit utilization rate — the ratio of your debt to available credit — when calculating your credit score. Paying down your debt reduces your credit utilization rate, which has a direct impact on your credit. The lower your credit utilization rate, the better your credit may be.
How can I reduce my debt and improve my credit?
If you are someone with bad credit who has a lot of debt, you may be wondering how to reduce your debt. Here are some effective ways you can reduce your debt and improve your credit:
- Pay off past-due balances.
Paying off past-due balances can help reduce your debt and improve your credit over time. A debt becomes past due when you don’t pay the balance due on time. Depending on the type of account and how long the balance has been past due, the creditor may send your balance to collections. Although a collection can stay on your credit report for seven years (according to Experian), paying off your past-due balance can show lenders that you’re committed to paying back what you owe.
- Pay down your revolving credit.
Your revolving credit, which consists of your credit cards and lines of credit, is what your credit utilization rate is based on. Your credit utilization rate is calculated by dividing your total debt by your total available credit. For example, if you have a total of $10,000 in credit available on two credit cards and a balance of $5,000 on one, your credit utilization rate is 50 percent, which means you're using half of the total credit you have available. According to Experian, a good credit utilization rate is below 30 percent because it shows lenders that you can manage your credit responsibly. Since your credit utilization rate accounts for 30 percent of your credit score, paying down your credit cards and keeping your balances low can help improve your credit.
- Increase your monthly payments (if you can).
Paying more than the minimum payment on your debts can help you pay off your overall balance faster and help improve your credit. Paying more also helps you prevent interest from accumulating, ultimately saving you money. Nerd Wallet recommends paying at least as much as you’ve charged in a particular month and as much as you can afford on top of that so your overall debt will continue to drop.
If you are someone with bad credit who is in need of vehicle financing and help improving your credit, a dealer enrolled in the Credit Acceptance program can help you get approved for financing on your next vehicle. And with on-time car payments, you can improve your credit. Simply fill out the auto finance pre-qualification form on our website to get started.
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