Improving Your Credit While you’re Still In Debt

CreditSoup Staff

November 8, 2018  •  4 Minute Read

Credit Basics

Most people plan to pay off all their debt sometime in the future. Even if that is several months (or years) down the road for you, there are still plenty of reasons to be optimistic. Debt payoff is a long strategy with multiple milestones along the way. You can continue to build a solid credit history and a better credit score, even if you cannot get rid of all your debt right away. Here are a few tips to help you get started.

How Debt Affects Your Credit Score

Many people are surprised to learn that it’s harder to improve your credit score without debt. People who never have any debt might not have much of a credit history. In many ways, you need some debt to keep your credit score in good condition. The trick is to have the right mix of different kinds of debt.

When it comes to the money you owe (instead of your payment history), there are two elements to which you need to pay attention: credit types and your credit utilization ratio. Not all debt is created equal, and lenders don’t look at your payments as if they are all the same. Generally, lenders like to see a nice balance of revolving and installment loans on your record.

Credit utilization is the other way that debt affects your credit score. It’s a big one, around 30 percent of your credit score. The way you use credit shows lenders how you handle your finances. Your total debt in relation to available credit creates your credit utilization ratio.

The credit reporting agencies generate this ratio one card at a time and all together. Someone who carries a little debt on a few cards may have a better rating than a person with several empty accounts and one that’s maxed out. Typically, try to keep this number below 30 percent.

If I Pay Off Debt Will It Improve My Credit Score?

Getting rid of the debt in the first place can be a highly effective way to boost your credit score. For many people, it isn’t quite as simple as a fast payoff. If you carry debt from month to month, you may need to consider a few strategies.

Before diving in, make sure you don’t accidentally do something to harm your credit score. Since payment history is the biggest portion counted here, confirm that you can make all of your minimum payments on time. Avoid closing credit accounts after you pay them off, especially older ones. This can increase your credit utilization and lower your score.

Ways to Pay Off Your Debt While Improving Your Credit Score

There are several debt reduction strategies, and they all have unique advantages. The good news is, you can try them and change if one isn’t working for you.

A few tactics friendly to your credit score might include:

• Focusing on revolving debt over installment payments
• Applying for a new card with a low initial rate for balance transfers
• Consolidating debt into a personal loan with a lower interest rate
• Increasing payments across the board to drop credit utilization

Some people like to begin with the lowest debt, so that they can pay it off and start on the next. Others choose the highest-interest debt first, because it will free more money faster.

Choosing a Debt Reduction Strategy

If you ask a variety of financial experts about the best way to pay off debt, you may get several answers. People who are trying to boost their credit scores at the same time should focus on approaches that take the most important components of a credit score into account.

Payment history and credit utilization represent the lion’s share of your score, so your best choice may be to pay off debt that lowers your credit utilization. This may or may not mean applying for a new loan. Some people are afraid of getting another card or personal loan because they think that new accounts will damage their credit.

Unless you’re worried that you will get into more debt after a balance transfer, this could be a good strategy for your debt and credit score. Increasing your available credit decreases your credit utilization, which may boost your score as a result. Shifting your debt to an account at lower interest could make your debt payments each month more effective.

If you’re looking at another decade of student loans or other debt, you may wonder how you can keep your credit score in good shape while working toward that final payment.

Taking the Next Step

Dropping your credit utilization ratio and protecting your payment history may be your best bet to improving your score, and CreditSoup can help. To start working toward your financial goals, request your free credit score or apply for a balance transfer credit card today.