We lied. Only SOME debt is bad.
Like an episode from Ripley’s Believe It or Not, some debt actually helps your credit score.
But first, the 15 second rundown: What’s a credit score/credit report?
- A credit report includes your credit score and states when and where you applied for credit, who you borrowed money from, and who you owe money to.
- Creditors and employers use credit reports to evaluate your applications for credit, insurance and employment.
- Good credit is essential for things like qualifying for a loan.
- Bad credit can hinder your ability to borrow money.
(There’s more about credit reports on page 20 of the Money Possible workbook.)
Got it? On to our favorite four-letter word.
Equifax said it best: Bad debt funds a lifestyle you can’t afford.
In other words, live within in your means. (Fredica has learned to do this…Go Fredica!)
Bad debt is using a high interest credit card and failing to pay it off IN FULL each month. Bad debt is owning store credit cards because you just can’t help yourself in Pottery Barn or Restoration Hardware. Bad debt is falling behind in your payments.
Good debt is investments that create value for you, like school loans and mortgages. Your home’s value will probably increase over time, and your education will likely land you a better job.
(Think your Pottery Barn apothecary cabinet “creates value” for you? It doesn’t, and you need to read “Needs vs. Wants.”)
Since most people can’t pay for hefty tuitions or buy a house with cash, they borrow money, and make monthly payments to pay off the loan. Good debt is debt you pay back ON TIME each month.
One thing to remember: Good debt comes after you have enough cushion in your savings.
The ugly: How does good debt and bad debt affect your credit report?
Your borrowing history, including the type of debt and pay back history, is listed in your credit report and impacts your credit score. In fact, 35 percent of your score is based on your payment history alone.
What does this mean?
- Pay your bills on time and borrow wisely. Period.
- Missing just one payment or paying late can turn your credit score ugly real fast.
- Don’t add a bunch of new debt before paying down old debt. That’s making a mountain out of a molehill.
- Be responsible and show creditors “I got this” by applying for credit only when necessary.
Long story short…not all debt can get you into trouble. Think about why you have debt and use your borrowing power wisely. And just like everything else…it takes time to improve your credit if it’s bad, but it’s doable. Budgeting, saving and living within your means are the keys to a great credit score.