Debt: the good, the bad and the ugly

The beginning of a new year is a good time to take stock of your debt and consider paying down some of your balances. Too much debt can turn ugly if not managed wisely, however, some debt can be a good thing, helping you to build credit history and improve your credit score.

Your credit score

Your credit score is what lenders use to determine credit risk when you apply for any kind of loan or credit, such as a car loan, mortgage or credit cards. The most commonly used score is the FICO® credit score — which ranges from 300-850.

Generally, the higher your score, the better interest rate you will pay on financing. For example, someone with a credit score in the 700s could potentially get an interest rate as much as 10 percentage points lower (i.e. 5% versus 15%) than someone with a score in the 500s.

What impacts a credit score?

Your credit score is influenced by many factors, including:

• Your payment history (number and severity of late payments, for example)
• How you use credit and your total debt
• The number and frequency of credit inquiries
• The length of time you’ve had credit

What is considered a good credit score?

• Over 740 is generally considered excellent
• 680 to 740 is considered good (approximately 60 percent of consumers have a FICO score of 700 or more)
• Below 680 will raise concerns (you may you have too much “bad” debt or your credit card balances are too close to your credit limit)
• Under 550 is sub-prime (you may still get credit, but it will be at a higher rate)

How credit card debt affects your credit score

Approximately one-third of your credit score is based on how you use the credit available on your credit cards. Experts recommend using less than 30 percent of your available credit (the sum total of all your credit card balances divided by your total credit card limit).

A zero balance on credit cards, however, can actually hurt you.Use a minimum of one to 10 percent of your available credit to establish an active credit profile with a positive payment history.

Make your payments on time

When it comes to your credit score, the importance of paying your credit card and other bills on time cannot be overstressed. Not paying on time can also trigger “late fees” or cause your creditor to increase your interest rate to a very high “penalty” or “default” APR.

Raising your credit score

If your credit score is not as high as you’d like it to be, you may improve it by:

• Always paying your credit card and other bills on time — be fanatical about it.
• Paying down your credit card balances to not exceed 30 percent of total available credit.
• Monitoring your credit report — watch for inaccuracies and how changes you make are reflected in the report.
• Obtaining a free copy of your credit report by going toAnnualCreditReport.
• Applying for a personal loan or home equity line of credit and consolidating your credit card debt into a single, lower interest rate loan.