Debt and bad credit seem like they go hand-in-hand.
You can't have one without the other.
Usually the debt comes first, and the bad credit comes after you've taken on more debt than you can handle.
To understand why debt makes your credit go down the train, think about how credit scores work.
The two biggest factors that influence your credit score are payment history and level of debt.
Together, these two things account for 65% of your score.
Hard Hit: Maxed Out Balances If you are strapped for cash and decide to max out your credit card balances, and fail to reduce your loan, your credit score will drop because your level of debt is too high.
The amount of debt you have represents 30% of your score.
The credit scoring calculation looks at how your credit card balances compare to your credit limit as well as how your loan balances compare to the original loan amount.
As you pay off debt, your credit score improves little by little.
But, if you're only making minimum payments, your debt is decreasing by a small amount every month and your score doesn't budge much.
Credit Score Knockout: Late Payments Carrying a lot of debt hurts your credit score, but doesn't necessarily devastate it.
Here's what happens to most people who end up with bad credit after debt.
When you reach the point that your credit cards are maxed out and the bank won't loan you anymore money, you're overextended.
You have more debt than your income can handle, which is why the bank won't loan to you anymore.
By this time, your minimum payments have probably become a struggle and you can't borrow any money to pay them, so you start missing payments.
Or, here's another scenario that happens often: you're juggling several different creditors and lenders along with your other bills and the rest of life.
Remembering to pay everything gets hard, so much so that you sometimes forget to pay bills.
The next thing you know it's two or three months later and your interest rate has skyrocketed to the much-higher penalty rate.
Your minimum payments take a similar movement and your catch-up payment is pretty much out of reach.
Many accounts end up being charged-off this way.
Payment history is 35% of your credit score - an even bigger factor than the amount of debt you're carrying.
The more payments you miss, the more your score falls.
Once you reach 90 days past due on an account, your credit score tanks.
It's much harder to recover from serious delinquencies like charge-off, collection and foreclosure, than it is to recover from big balances.
Once you pay down the balance, your score can recover.
However, late payments stay on your credit report for up to seven years.
More recent payments hurt your score the worst.
What to Do If you're maxed out, but still current on your payments, do what you can to keep it that way.
Cut your expenses down to the bare minimum if that's what it takes to save your credit score.
Dealing with your debt, may come down to a decision between debt settlement and bankruptcy.
In either case, don't be afraid to temporarily sacrifice your credit score to become debt free.
Once you've settled your debt or have it discharged in bankruptcy, you can work to rebuild your credit.
You can't have one without the other.
Usually the debt comes first, and the bad credit comes after you've taken on more debt than you can handle.
To understand why debt makes your credit go down the train, think about how credit scores work.
The two biggest factors that influence your credit score are payment history and level of debt.
Together, these two things account for 65% of your score.
Hard Hit: Maxed Out Balances If you are strapped for cash and decide to max out your credit card balances, and fail to reduce your loan, your credit score will drop because your level of debt is too high.
The amount of debt you have represents 30% of your score.
The credit scoring calculation looks at how your credit card balances compare to your credit limit as well as how your loan balances compare to the original loan amount.
As you pay off debt, your credit score improves little by little.
But, if you're only making minimum payments, your debt is decreasing by a small amount every month and your score doesn't budge much.
Credit Score Knockout: Late Payments Carrying a lot of debt hurts your credit score, but doesn't necessarily devastate it.
Here's what happens to most people who end up with bad credit after debt.
When you reach the point that your credit cards are maxed out and the bank won't loan you anymore money, you're overextended.
You have more debt than your income can handle, which is why the bank won't loan to you anymore.
By this time, your minimum payments have probably become a struggle and you can't borrow any money to pay them, so you start missing payments.
Or, here's another scenario that happens often: you're juggling several different creditors and lenders along with your other bills and the rest of life.
Remembering to pay everything gets hard, so much so that you sometimes forget to pay bills.
The next thing you know it's two or three months later and your interest rate has skyrocketed to the much-higher penalty rate.
Your minimum payments take a similar movement and your catch-up payment is pretty much out of reach.
Many accounts end up being charged-off this way.
Payment history is 35% of your credit score - an even bigger factor than the amount of debt you're carrying.
The more payments you miss, the more your score falls.
Once you reach 90 days past due on an account, your credit score tanks.
It's much harder to recover from serious delinquencies like charge-off, collection and foreclosure, than it is to recover from big balances.
Once you pay down the balance, your score can recover.
However, late payments stay on your credit report for up to seven years.
More recent payments hurt your score the worst.
What to Do If you're maxed out, but still current on your payments, do what you can to keep it that way.
Cut your expenses down to the bare minimum if that's what it takes to save your credit score.
Dealing with your debt, may come down to a decision between debt settlement and bankruptcy.
In either case, don't be afraid to temporarily sacrifice your credit score to become debt free.
Once you've settled your debt or have it discharged in bankruptcy, you can work to rebuild your credit.
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