No matter who you are, debt can creep up on you. At first, your debt might seem manageable, but it can quickly snowball out of control. Before you know it, you’re struggling under a mountain of debt. Then the worry starts to accumulate.
If you’re in debt, do you automatically have bad credit? What does your credit score affect? What can you do to improve your credit if you’re in debt?
Your credit score can impact just about everything from housing to transportation and even life insurance, so it’s important to stay on top of it. Today, we’ll talk about how to improve your credit score when you’re in debt, even if you’re struggling to pay it off.
What impacts my credit score?
There’s nothing as frustrating as being in debt… unless you count knowing that your debt is impacting your future. A bad credit score can negatively affect just about everything in your life, but what affects your credit score?
The specifics of what impacts your credit score can vary. There are a few different types of credit scores, but they all have a few things in common. These are the things you want to focus on when you’re planning out how to improve your credit score when you’re in debt.
Things that definitely hurt your credit
No matter what kind of “scorecard” credit companies use, there are four big things that determine your score.
First, how much money have you borrowed? This one might seem obvious, but we’re not just talking about how much debt you’re in here. One of the things companies look at is called “credit utilization”. This is the comparison between how much you were allowed to borrow, and how much you’ve used.
As an example, let’s say you’re at your grandma’s house and she offers you a plate with a dozen cookies. You thank her and take all 12. Your “cookie credit” utilization is at 100%. And grandma probably thinks you have terrible manners.
To get back in your grandma’s good books, you only take 1 of the 12 cookies next time you visit. Your “cookie credit” utilization is now at 8.33%. Your grandma now comments on how polite you are and invites you to take another.
This is what the major credit bureaus do with your available credit. If you use it all up, your credit score suffers. If your utilization rate is low, between 1% – 20%, your score shoots up. Some credit companies may even offer you cards with lower interest rates or better perks as a result, too!
Next, companies will look at how much of the money you’ve borrowed has been paid back on time. This is where most people’s credit score takes a huge hit. It’s hard to figure out how to improve your credit score when you’re in debt if you haven’t paid things back on time.
Then you have to consider how long you’ve had (and been responsible with) the money you’ve borrowed. This is called the “age” of your credit, and it’s one of the few ways that being in debt can help you boost your credit score (more on that later).
Finally, you’ll be scored on how many different things you’ve borrowed money for. This is called “credit mix”. So if you’re in debt, but you have a student loan, an auto loan, and a credit card to pay off, you actually have a good credit mix! With all these things in mind, you can start forming a plan for how to improve your credit score when you’re in debt. Next, let’s look at some common questions about specific debts that can impact your credit score.
Does student loan debt affect my credit score?
The simple answer is yes. The more complicated answer is that what kind of student loan debt you have will affect how much it can hurt your credit score. This means you may have to edit your plan for how to improve your credit score when you’re in debt depending on whether you have private or federal loans.
If you have private student loans, the debt functions much like credit card debt. This means that if you miss a payment, the company will wait 30 days. Then, they’ll report the delinquency to credit bureaus, lowering your score. A missed or late payment will be on your report for 7 years. After that, as long as you’ve kept up with repayments, it can be removed.
Meanwhile, federal student loans have a separate law governing them. Under this law, late payments are typically reported after 180 days. However, a late payment or delinquency will never be removed from your credit report.
When you’re learning how to improve your credit score when you’re in debt, student loans can help! First, they improve your credit mix, just by existing. Second, if you feel like you’ll never pay off your student loans, remember that credit age also affects your credit score.
As long as you’re making your payments on time, student loan debt can work in your favor! This is why making those payments is so important, even if it’s only the minimum. While making minimum payments won’t necessarily solve your credit problems, it’s much better than not making them.
Does medical debt affect my credit score?
Medical debt can affect your credit score with one important qualifier. If your medical debt has gone to collections, it will negatively affect your credit score. Otherwise, medical debt does not affect your credit score.
When it comes to medical debt, the most important thing you can do is call the hospital. You can take out a set up a payment plan with the hospital, ask about debt relief programs, or even dispute the bill.
All of these things will prevent your bill from going to collections. Preventing your bill from going to collections is the only thing you have to worry about when planning how to improve your credit score when you’re in debt with medical bills!
Does having a mortgage or a second mortgage affect my credit score?
Yes, mortgages affect your credit score. Learning how to improve your credit score when you’re in debt is hard, but a mortgage can help it in the long term. Keep in mind, though, that your credit score may drop when applying for a mortgage. The good news is that this drop is temporary, and making payments on time can help your credit in the long run.
Does rent or utility bills affect my credit score?
Nope, not unless you want them to. Landlords aren’t allowed to report missed or late payments on rent without paying a fee for each incident they’d like to report. However, if you’ve never been late on rent and you want your credit score to reflect that, you can find several services (like RentTrack) that will report it for you.
Utility bills are much the same. LevelCredit can report these for you, as well as your cell phone payments!
Rent and utilities don’t automatically hurt your credit score when you miss payments, which is good news. When making a plan for how to improve your credit score when you’re in debt, though, everything counts. Reporting these payments can make a huge difference, especially over time!
How can I improve my credit score?
Ok, now that we know what impacts your credit score, let’s look at how to improve your credit score when you’re in debt.
Check your credit report
You can do this for free, and no, checking your credit yourself doesn’t hurt your credit score. The only credit checks that will damage your score are “hard pulls” – credit checks that are run before you borrow money.
Checking yourself is called a “soft pull”. A “soft pull” can be inaccurate by a couple of points, but it doesn’t damage your credit. Checking is one of the most important steps when planning how to improve your credit score when you’re in debt.
Did you see something on your credit report that just wasn’t true? Report it! If your identity was stolen or debt was misreported, you can have it removed from your report. Depending on how large the inaccuracy was, this can boost your score by dozens of points instantly.
Get credit for everything (literally)
Remember when we mentioned that you can have your rent, utilities, and even your cell phone bill listed on your credit report? DO THAT. Over time, this can take your credit score into a whole new category.
You can even pay for your groceries, gas, and other necessities using a credit card instead of debit. Then, just pay off the credit card in full that month. This way, every purchase you make is helping you boost your credit. Adding purchases to your credit report is great when learning how to improve your credit score when you’re in debt.
As long as you can access a credit card, you can start boosting credit like this!
Pay off debts (carefully)
So, you’re within sight of paying off a debt. Whether that’s an auto loan, a student loan, or a mortgage, it feels great to almost be rid of the payments. But don’t rush ahead!
Paying off debt can actually ding your credit score. Age of credit and credit mix are 2 of the 4 categories used in determining your credit score. When you pay off a debt, your age of credit and credit mix suffer.
If you pay off a huge amount of debt all at once, your score can suffer even more, especially if you’ve missed payments on this debt in the past. So when you’re making a plan for how to improve your credit score when you’re in debt, opt for auto-pay from a savings account instead.
Add new credit…
There are lots of ways to do this. If eligible, you can take out a personal or auto loan. This will help your credit mix and give you a chance to make on-time, higher-than-minimum payments.
If you have a friend or family member who’s willing, you can be added as an authorized user on someone else’s credit card. Being added to someone else’s credit card, as long as they have good credit and make their payments in full and on time, can boost your credit score.
You don’t need to hold the credit card or make even a single purchase. All you need for this tip for how to improve your credit score when you’re in debt is the paperwork associating you with their account.
…but watch your utilization rate.
Finally, there’s utilization to look at. This was the first thing we talked about when we were looking at what affects your credit score, but it’s last here for a reason. If you’re in debt, your credit utilization ratio is probably on the high side.
Once you start bringing that debt down and opening new loans or credit cards, you can work on your utilization rate more. When you’re figuring out how to improve your credit score when you’re in debt, though, this is less important.
I’m struggling financially – how do I keep this from hurting my credit?
You’re not alone. Nearly half the American population is struggling with their finances. Between the pandemic and the following economic crisis, millions of people find that they’re struggling more financially now than they were a few years ago.
If you’re trying to make a plan for how to improve your credit score when you’re in debt, but you find yourself unexpectedly struggling, don’t worry! You can do things to mitigate or even erase the effect your current financial hardship has on your credit.
Negotiate and look for help
This is especially true of medical bills, as we mentioned earlier. Don’t stop there, though. If you’re struggling financially, you can negotiate or look for discounts on many bills. Your cell phone company, for instance, may have a plan that’s cheaper than the one you’re on, without any major difference in your service.
For bills like your rent or utilities, try applying for temporary assistance. You can apply at the federal or state level for government assistance. You can also search for local charity organizations that might be helping people in your area.
Work with your creditors
You might be surprised just how flexible people are willing to be if you ask. First, you can call your creditor and ask if they have any protocols in place for people that are experiencing financial hardship. They may be willing to lower your monthly payments, agree to avoid sending you to collections for a set amount of time or agree to delay reporting to credit bureaus.
If none of these things are available, your plan on how to improve your credit score when you’re in debt isn’t ruined. This is what an emergency fund is for! You can prioritize the payments that will hurt the most in the long run if you miss them.
No emergency fund or your emergency fund is too small? No worries. As long as you can prove employment, you’ll likely qualify for some kind of personal loan. You can use this loan to pay off your larger debts on time. Taking out a personal loan will usually buy you anywhere from 2 – 4 weeks before you have to make another payment.
Worst case scenario? You can contact the major credit bureaus and ask to leave a consumer statement explaining the situation next to a negative mark. This won’t impact your credit score, but individual lenders – like a landlord, bank, or car dealership – may take it into account.
Improving your credit score –even when you’re in debt
Credit matters. In some ways, it’s like a financial key to the world. When you improve your credit score, more financial opportunities are available to you.
Learning how to improve your credit score when you’re in debt is hard. Struggling under monthly payments and trying to guess which ones make the most difference can be discouraging.
The good news is that improving your credit score is never impossible. There are always steps you can take, and while you won’t go from a 520 score to a 720 score overnight, you’ll get there eventually. Millennial Dollar is here to help you along the way. Subscribe to our newsletter and you’ll get the latest tips, tricks, and info on credit and budgeting delivered right to your inbox!