How Debts Can Hurt Your Credit History
Can debts hurt your credit history? Ordinarily, debts will not hurt your credit history, all things being equal. In fact, if you manage and pay your debt promptly, it will help you build your credit history and it will ultimately boost your credit score. Without credit, you cannot claim to have credit history. So, if you have been paying for all your purchases in cash, this may mean that you are comfortable financially. But to lenders, you may not be able to prove that you are creditworthy. If you want to borrow, lenders will like to check your credit report so as to ascertain your creditworthiness. Without credit history, there is no way lenders can gauge the risks involving lending you money. There will be nothing to make them believe that you will pay back the loan in case they grant you the loan.
However, there are instances when debts can hurt your credit and you should try to avoid them. These will be explained below:
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- Huge Credit Card Balances: If you are carrying huge credit card balances, you might also have high credit utilization ratio. This means that your credit history will indicate the extent to which you have been stressing your credit limit over time. For you to be able to build your credit score with your credit, you should keep your credit utilization below 30%. Maxing out your credit card is an indication that you are having difficulty with your finance. Also, you need to understand that the amount you owed contribute 30% to how your credit score is calculated.
- Missed/Late payments: If you miss your payment, your lender may not report it to the credit bureaus immediately especially if you have been making your payments promptly. If this is the case, you can quickly pay the amount and this will not affect your credit history. But if your credit card payment is past due, that is, it is more than 30 days, it can be reported as a late payment. For mortgage loan, you should understand that your lender can report the late payment just a date after your payment has been due. So, if the late payment is reported to the credit bureaus, it will impact on your credit history negatively. Late payment will remain on your credit report for seven years. If you have history of late payment on your credit report, this can make lenders turn down your application for new loan or credit. With late payment on your credit report, if any lender agrees to grant you a loan, it will be at a very high interest rate.
- Inability to make at least minimum payment: While your lender may not mandate you to pay huge amount off your loan every month, you will be expected to make at least minimum payment. Anything less than minimum payment may not be acceptable. And this may not help your credit history.
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In conclusion, debts on its own may not hurt your credit history, it is the way you manage the debts that will determine whether your credit will be hurt or not.