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Ways Being Smart About Debt Can Raise Your FICO Score

What you'll learn: Raise your FICO score by being smart about debt


Being in debt doesn't have to mean a bad FICO score. In fact, carrying some debt and managing it well can help your credit score soar. Whether you're struggling with debt or you’re just trying to build your credit, these tips can help keep your FICO score up.

Pay bills on time

You may be surprised to find that making payments promptly makes up the biggest part of your FICO score (35%). That means simply paying your bills each month is a huge boost your credit score — but, similarly, missing payments or running late will drive your score down. This means that making payments on time needs to be your highest priority. Avoid accidentally missing payments by setting up online billpay with your financial institution, which can automatically send bill payments out on their due date. You should also set up reminders on your calendar or to-do app so you know when bills are coming due and can’t miss them.

If you're already behind on bills (or you’re about to be), contact your creditor immediately. While there are no guarantees, they may be able to work with you so your credit isn't negatively impacted. Regardless of what you work out, get a payment made as soon as possible.

Be careful about credit utilization

Debt — even a lot of debt — isn't necessarily bad for your FICO score. More important than the total amount of debt you have is how much of your available credit you're using, known as your credit utilization. Take how much debt you have on your credit cards and lines of credit — loans, like your mortgage and car loan, don’t count  — and compare it to your credit limit.

For example, if you have $500 worth of debt on a credit card with a $1,000 credit limit, your credit utilization rate is 50% — which is far too high. If you have any maxed out credit cards, that’s bad news for your credit utilization. You should do whatever you can to keep your credit card balances low, which keeps your credit utilization rates low, too.

Get multiple kinds of credit

While it only makes up 10% of your FICO score, having a variety of credit types can improve your score. Though you don't want to open accounts you don't need or run up debt in an effort to raise your credit score, you should keep it in mind. Adding an auto loan or a new line of credit — if it makes financial sense to do so — could diversify your credit mix, improving your score.

Plus if you pay these new accounts on time every month, you'll have an ongoing source of positive news feeding into your credit report, which will slowly boost your score.

Consider getting a personal loan

A personal loan can be a great credit-building tool if used properly. A personal loan or debt consolidation loan could be used to pay off your credit cards, moving that high-interest debt off to a low-interest loan. If you're struggling with credit card debt, that can immediately help lower your monthly bills while reducing the number of bill payments you need to keep track of.

Beyond that, using it to pay off credit card debt will immediately improve your credit utilization for a better FICO score. (Just be sure you don't get tempted to run up more debt on your balance-free credit cards.) It also adds to your mix of credit types and, if you pay it off on time, adds more payment history to your credit report.

If a personal loan is a good fit for your financial situation, consider a loan from PenFed. Our personal loans can fit any financial need, and with rates as low as %* APR, they're much more affordable than a high APR credit card.

*Rates effective December 6, 2017 and are subject to change.


Want to Learn More About Your Credit Score?

Check out The Ultimate Guide to Understanding Credit Scores.

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