How Different Types Of Debt Affects Credit Score

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How Different Types Of Debt Affects Credit Score

How Debt Affects Credit Score

When going through the process of shopping and obtaining a mortgage your FICO credit score is one of, if not the most important factor when getting approved for a loan.  Since there are different thresholds for different loan programs, you having a credit score slightly too low can get you out of a program or demand a higher down payment as a result.  For instance it your FICO credit score is 578 and you want an FHA loan, you are now going to have to come up with 10% down payment instead of 3.5%.  This is due to the fact that credit scores of 500-579 require more down payment as they are deemed riskier for the lender to write.  If you were just 2 points higher, this could have all been avoided.  Knowing the debt you have on your credit and how the debt affects credit score is vital in preparing for getting approved for a loan and not approved.

Not all debt is created equal as you can break down debt into 2 main categories and that is secured and unsecured.  Secured debt is a loan that is guaranteed by collateral (car, house, etc) while unsecured debt is a loan that isn’t guaranteed by collateral (personal loan).  For example when getting a loan for a home, the debt is guaranteed by the home, so if you fall behind on your payments, the bank or lending institution can take back the home in an effort to recoup the money it is owed.  On the other hand, unsecured debt means the bank or lending institution who made the loan can’t reclaim any property or collateral that the money was borrowed against.  There is a group of 4 main types of loans and we will go over how the debt affects credit score.

How Debt Affects Credit Score: Student Loans

Student loans are one type of unsecured debt; however they don’t affect your credit score in a negative way as long as you make sure to pay your bills on time.  Since student loans can be paid back on 10-30 years terms, having positive payment history with one debt for a long period of time can actually help your credit score as time moves on.  This philosophy is also good with other loans in the fact you can show quality payment history or a significant amount of time.  The positive of timely payments can still hurt you if you owe a large amount monthly in student loans as this debt is used in you debt-to-income ratio, so make sure you know your numbers when applying for a loan and how debt affects credit score.

How Debt Affects Credit Score: Payday Loans

Payday loans which is another type of an unsecured debt is not very positive for you necessarily and can even wind up negatively affecting your credit score.  As you take out and repay payday loans, most of the time these debts don’t show up on your credit report so positive repayment will not factor in to your credit score.  However, if you default on a payday loan you better believe this will hit your credit report and will be a negative factor when trying to get approved for a mortgage.  So tread very lightly when taking out these types of loans as this debt affects credit score,

How Debt Affects Credit Score: Auto Loans

Auto loans are another type of secured debt as the collateral used to guarantee the loan is the vehicle which you are paying on.  If you by chance fall behind, you could see the lender try to repossess the vehicle in order to recoup what is owed to them.  Since auto loans are a different type of loan, it could be a benefit to have this on your credit as it varies from mortgage and unsecured debt you may have.  From a lending standpoint, auto loans have minimal requirements and are easier to obtain than credit cards, so this may be a positive when trying to get a mortgage since you already got approved for a debt that needs to meet qualification standards.

How Debt Affects Credit Score: Existing Mortgages

Mortgages are the prototypical secured debt because the bank holds collateral on your piece of property.  Mortgages offer the most positive credit impact when paid on time and for many years.  The one down side is if you miss a payment and then go and try to get another loan or refinance, some lenders may think twice before welcoming you with open arms.

How Debt Affects Credit Score: Conclusion

Knowing how debt affects credit score is something all borrowers need to learn and understand.  Sometimes it isn’t wise to go around opening lines of credit at every store and credit card applications.  You need to be strategic in what debt you take on and how you treat that debt.  Working with a professional like myself to guide you can put you in great shape to get that mortgage or refinance you desire.  Please call me any time at 888-900-1020, email me at, inquire through my website

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