How can paying off debt impact your score …
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When you're dealing with a lot of debt, it's natural to also worry about your credit score. But depending on your goals, that concern might be misplaced, or at least, temporarily less important. Let's explore how getting out of debt can affect your score, and when your score should (and shouldn’t) be top of mind.
When the very first credit scoring models were created in the 1950s, they were intended as abstract tools to help lenders assess risk. Since the introduction of the first FICO in the 1990s, they’ve expanded to become a more holistic measure of credit health used by everyone from landlords, insurers, and credit card companies to even some employers, all trying to validate your financial trustworthiness.
A credit report is a comprehensive overview of your borrowing and payment history. A credit score is a weighted number between 350 and 850 assigned based on your overall credit health. Different models (TransUnion, FICO, Equifax) can score you with slight variation, but in general, scores follow the ranges below:
Your credit score is impacted by five main components of your report:
Payment history and credit utilization have the most significant impact, while the other factors also play a role in determining your overall creditworthiness.
When you're trying to do things like buy a house, get a credit card or take out a car loan – your credit score and report can be used by decision makers to determine whether or not you qualify.
Credit scores matter, because they are used to varying degrees to make decisions about your trustworthiness. But it’s important to look at each situation carefully and alongside your financial goals to determine how much weight and importance the score has at a particular phase in your life.
At a high level, credit scores matter most when you are trying to borrow money or get credit. They matter the least when you are already in debt and trying to get out of debt, or in scenarios where you're only being judged on specific parts of your credit report instead of the number alone.
Some debt solutions can temporarily impact your credit score. Some people view this as a cause for concern, but in general, if you are already struggling with debt and you are actively trying to get out of it, your credit score is probably going to be less important.
After all, when you're trying to be debt-free, you don’t need to worry about having a good score to take on more debt. So, any dips in your score may be uncomfortable but shouldn’t impact you very much since you're not in a position to borrow more money anyway.
If you’re renting an apartment, a landlord may have a lower threshold for your score range and instead be looking to see if you are delinquent on accounts or have a long history of missed or late payments. They may care less about scores that are low due to high credit usage or debt-to-income ratio (DTI) as long as you can prove you have sufficient income and are consistently making payments – ensuring you’ll be able to pay them every month.
Because all landlords are different, there is going to be a lot of variability in their requirements. For example, a large leasing company may have a strict formula that doesn’t take someone's personal situation into account, whereas a smaller landlord is more likely to consider your individual circumstances and can make it easier for folks with very low scores to qualify for a rental.
Credit score has a high impact on your ability to take out new credit cards or loans. A very high score means higher chances of approval and qualifying for larger loans or credit limits. If you have a low credit score, you may have access to smaller amounts of credit and your interest rate is likely to be higher – which means you’ll pay more for what you borrow.
Credit scores have a high impact on your eligibility for a mortgage. So if you are planning to buy a home, your credit score becomes an essential factor. A higher score not only increases your chances of approval but also qualifies you for better terms and lower interest rates – which could save you tens of thousands over the life of a mortgage.
If your score is in the “fair” or “poor” range, you might still qualify through government-backed loans like FHA, but you’ll likely need a larger down payment and will pay a higher interest rate.
Credit scores have a moderate to high impact on your ability to get a car loan. However, there is going to be a lot of variability here because a car loan is a secured debt.
If your score is on the lower side, you may still be able to get a car loan, but you’ll probably be given a higher interest rate and stricter terms. Lenders are more willing to work with lower scores here because the vehicle acts as collateral that can be repossessed.
In most cases, prospective employers do not check your credit score. But sometimes, jobs that involve financial responsibilities, sensitive financial information or other clearances, may conduct a credit check (with your permission) as a way to measure your financial trustworthiness.
These employers aren’t looking for a perfect credit score, but they may be checking for red flags such as bankruptcy, collections, or significant delinquencies. Still, this type of check is rare and doesn’t impact most job seekers.
It’s true that some consolidation options or hardship programs can cause a temporary change in your score. But in most cases, the long-term benefits like reduced balances, financial stability, and being on a path to becoming debt-free outweigh the short-term cost.
Once you're back on solid financial footing, rebuilding your score is often a natural next step.
Before worrying too much about your credit score, it’s helpful to step back and ask yourself what your primary financial goal is.
If you’re applying for a mortgage soon, improving your score could make a major difference. But if you’re drowning in high-interest credit card debt, solving your debt issue is likely the more urgent and important task.
Improving your credit score over time becomes much easier once the underlying debt problems are under control.
