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
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. Fill out the form on our website to start your
credit approval today!