How Does Debt Affect My Credit Rating?

Most people would think that the more debt they have, the worse their credit rating is. But, unfortunately, it‘s not that simple. Anybody who uses credit cards or takes a loan can be considered to be in debt. That is fine by many Credit Reference Agencies. So, when does debt put a black mark on your credit report?

Well, if you are unable to pay back your creditor in time, it obviously reduces your credibility as a debtor. As a result, your credit rating goes down. The worst scenario for your credit rating could be when you are in a situation that you have to file for bankruptcy. Credit ratings reduction from bankruptcy takes a very long time to recover, in some cases, as much as ten years. Once you have that on your credit report, it will be very tough for you to obtain more loans or mortgages for a very long time.

If, on the other hand, you are consistent and punctual in your debt payments, then there is no effect on your credit ratings. In fact, it improves them. This is so because a credit rating agency is not only looking at the amount of money you owe but also your previous response to debt and how you have managed it. You may run into considerable debt by using your credit card, but if you pay the bank back on time, your credit rating is maintained.

In fact, your credit ratings are also likely to suffer if you never run into debt. The whole concept behind ‘credit’ and ‘rating’ is scoring your debt paying history. More often than not, banks will refuse a person a loan if that person has never run into debt. This is because, in such a case, your banker does not have an account of what to expect from you in terms of debt repayment. If there is no debt that you have had and cleared, the bank would see you as a high risk investment because in their view, you would be a novice at debt management and thus, you are considered more likely to default.

Also, it is not debt itself that would affect your credit rating but often the approach you take to get out of debt that would. For instance, debt management (credit counseling) would stay as a negatively influencing notation on your credit report. It will remain on your report for seven years. If you fail to pay back your debt and accumulate an amount that is way beyond your means, you might have to opt for bankruptcy. Now that can really affect your credit score and would keep on hounding you for six to ten years.

So, the need of the hour is not to stop borrowing, but it is to borrow within your means. Know your limits. Borrow just as much as you know you can pay back easily. Often when a debtor gets carried away with borrowing, his debt becomes a problem for him.