Credit Card Debt and Your Credit Rating
Your credit rating is the number that lenders look at when deciding whether or not you're a good candidate for a line of credit. If your number is poor (300-500), you will either be denied credit or charged a hefty interest rate. If you have a good or excellent credit rating (600-800), you'll enjoy some of the best deals that lenders have to offer.
Many factors help determine your credit rating. A history of timely payments and high credit limits will pump it up. Late payments and defaults will tear it down. But did you know that too much credit card debt will also harm your credit score? That's because lenders who look at your credit history take note of your debt to credit ratio. As the name suggests, this ratio lets the lender know how much debt you're carrying compared to how much credit you have available. A person with high credit card limits and very little debt will receive the biggest boost to their credit score. On the other hand, high credit limits won't help you if your credit cards are maxed out.
A high debt to credit ratio suggests to lenders that you might have trouble controlling your spending. They are more likely to decline you for loans if your ratio is high because they'd be taking a risk by loaning you money. Your credit score will also fall to reflect this level of risk.
If your credit card debt is hurting your credit rating, there are some steps you can take to get your credit score back in shape. First, pay off as much debt as you can. Consolidate your credit card debt by taking out a low-interest personal loan to cover the costs. You'll spend less money repaying the loan than you will paying off interest-laden credit card debt.
What if loans aren't an option because of your low credit rating? It's possible to obtain zero-interest credit cards and transfer your existing debt onto them. The secret is to make sure you're able to pay off your balance in full before the zero-interest introductory phase comes to an end. Most of these cards offer zero interest on balance transfers for six months to a year. After that, your debt will be subject to interest fees once again.
Once your credit cards are paid off, ask for higher credit limits. Also consider appling for a bad credit credit card, which although will be issued with a low credit limit, this will rise over time as you use the card responsibly. Paying off your cards and obtaining higher credit limits speaks well of your financial responsibility. Your credit rating will rise as a result - and lenders will notice.
