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How to Establish Your Credit Score While Managing Debt

Establishing a strong credit score while managing your existing debts may sound straightforward. After all, your credit score is primarily built on how you handle debt. It makes sense that reaching your credit goals simply requires managing your debts the right way.

But in practice, this process isn’t always so easy. First, you need to understand how your actions surrounding your debt can affect your credit score, both positively and negatively. Second, you need to implement behaviors that positively affect your credit score, which can be difficult when you’re struggling with debt.

Here’s how to establish your credit score while effectively managing your existing debts.

How to Understand Your Debt

Before you start to work on reaching your credit goals, you need to understand your current debt situation. This can help you identify the best ways to tackle that debt in a way that establishes credit. Compile a list of all your debts, including:

  • The name of the creditor
  • The type of loan (home, auto, credit card, etc.)
  • The total amount owed
  • The interest rate
  • The minimum payment
  • The monthly due date

How to Prioritize Debt Repayment

Paying your debts on time is the best thing you can do to establish credit, as payment history is the biggest factor that goes into creating your credit score. This means you can establish better credit simply by paying down debt! And if you want to help reduce or eliminate debts, there are two common strategies you can choose from.

With the debt snowball method, you list all your debts in order from smallest to largest and focus on paying the smallest ones first. You make minimum payments on the other debts and put extra funds in your budget toward the smallest debt until it is eliminated, then move on to focus on the next smallest debt. This strategy can help provide some quick psychological wins and reduce the number of monthly payments you have, but it doesn’t consider interest rates, which means you might pay more in interest over time.

With the debt avalanche method, you list all your debts in order of highest interest rate to lowest interest rate and focus on paying the highest interest rate debts first. You make minimum payments on the other debts and put extra funds in your budget toward the highest interest debt until it is eliminated, then move on to focus on the next highest interest rate debt. This strategy puts more money back in your pocket in the long run, but it might take longer to pay off larger debts with higher interest rates.

Another option is debt consolidation, where you combine multiple debts into a single payment.

There are many ways to consolidate debt: you may transfer multiple credit card balances onto a single credit card with a low introductory interest rate, or you may take out a debt consolidation loan to combine your debts and establish a fixed monthly payment. Consolidating debt can help streamline repayment and make it easier to keep track of your debt, but it only makes sense if you can qualify for a lower interest rate, which may be challenging if you have poor credit.

What Makes Up a Credit Score?

Your credit score determines your ability to qualify for the credit products you want, and the interest rates you can access (better credit scores generally allow you to qualify for lower interest rates). It can even affect your ability to rent homes from certain property managers.

The following key factors affect your credit score.

  • Payment history. Payment history looks at your track record of paying your bills, including your history of on-time payments and late payments. The more on-time payments you have, the better. This is the most important factor that makes up your credit score.
  • Credit utilization. Your credit utilization ratio is the amount of revolving credit that you are currently using. For example, the current balance of your credit cards compared to the available credit limit. Lower credit utilization is generally better.
  • Length of credit history. The age of your oldest account, newest account, and the average age of all accounts can affect your credit score. As a general rule, a longer credit history is better for your credit score.
  • Credit mix. Your mix of installment credit accounts (debts with fixed monthly payments, such as a car loan) and revolving credit accounts (debts with variable monthly payments, such as a credit card) can impact your credit score. A healthy mix of both can demonstrate you are able to handle different types of credit and is beneficial for your credit score.
  • New credit. Your credit score also factors the number of new credit accounts and hard inquiries on your credit report. Too many recent accounts and applications for credit can show you are hard up for credit, potentially lowering your credit score.

How to Maintain Good Credit Habits

Here are the good credit habits you need to employ to help establish a strong credit score while managing your existing debts.

Make On-Time Payments Every Time

As we mentioned above, payment history is the biggest influence on your credit score. Paying your bills on time every month can help establish credit, while late payments can negatively impact your credit score. Here are some ways to establish a better payment history:

  • Pay your bills on time and in full each month to help establish a positive payment history.
  • Set up automatic payments with your creditors or create calendar reminders to pay your bills.
  • Call your creditors and service providers if you think you might miss a bill payment before you’re late. You might be able to work out an alternate repayment solution that won’t negatively impact your credit score.

Manage Your Credit Utilization Ratio

Your credit utilization is the amount of available credit you are currently using. For example, if you have two credit cards with a combined credit limit of $20,000 and a combined balance of $5,000, your utilization for those cards is 25%. Keeping a low credit utilization ratio can help establish a strong credit score (it’s often recommended to keep your utilization across all revolving accounts under 30%). Here are some ways to help improve your credit utilization:

  • Open a new credit card to increase the amount of available credit (but only if you can afford to do so).  
  • Pay down your credit card balances and other revolving debts.
  • Request a credit limit increase for your credit cards (but only if the increased limit wouldn’t tempt you to overspend).
  • Pay off your entire credit card balance in full every month.

Avoid Multiple Credit Applications at Once

Too many credit applications in a short time frame results in several hard inquiries landing on your credit report, which can negatively impact your credit score because it can indicate you are desperate for credit. Shopping around for a single type of account in a short time frame — for example, rate shopping for a mortgage — shouldn’t negatively impact your score. But applying for many types of new credit in a brief time window can be damaging.

Check Credit Report for Inaccuracies

Inaccuracies in your credit report can negatively impact your credit score. You should regularly check your credit report and dispute inaccurate information. When you review your credit report, look for inaccuracies in the following sections:

  • Basic Information: Personal information including your name and past addresses.
  • Accounts: The accounts you have held in the last seven years.
  • Public Records: Bankruptcies you declared in the last seven or ten years.
  • Credit Inquiries: Hard inquiries for credit applications you submitted.

You can dispute inaccurate information with the credit bureaus online, over the phone, or by mail. At a minimum, you should prepare a dispute form or dispute letter that provides the following information:

  • Your name and contact info
  • The credit report number
  • The name of the party that provided the disputed information
  • The account number or information identifies the disputed information
  • An explanation of why you are disputing the information
  • An explanation of documents you are including to prove the information is inaccurate

Once you submit your dispute, you might have to wait 30 to 45 days as the credit bureau investigates and reaches out to the party that furnished the disputed information. If the credit bureau verifies that the information is inaccurate, it will be removed from your credit report. If the information was negatively impacting your credit, you can see it positively affect your credit score.

Use Secured Credit Cards

Credit cards are one of the easiest ways to establish credit when you keep a low balance and make your monthly payments on time. But if you have poor credit or limited credit history, you may find it difficult to get approved for a credit card.

It is much easier to get approved for a secured credit card, which requires an upfront security deposit. The amount of your deposit is usually equal to the available credit limit on the card. For example, you might pay a $500 deposit to get a card with a $500 credit limit (some companies may offer a credit limit exceeding that of your security deposit). Some card issuers may even refund your security deposit after a period of consistent, timely payments, transforming your secured credit card into a traditional card.

The best part is that secured credit cards report activity to the credit bureaus the same as traditional credit cards.


Is it possible to manage debt and still reach my credit score goals?

Yes, it is absolutely possible! In fact, having debt and managing it correctly is one of the best ways to establish your credit score. When you have debt, focus on the following key strategies:

  • Always pay your bills in full and on time each month.
  • If you want to reduce debt, establish a strategy for paying it down. You can use the debt snowball method, the debt avalanche method, debt consolidation, or another strategy to reduce debt.
  • Keep your credit card balances and other revolving credit balances low in order to maintain a healthy credit utilization ratio.
  • Avoid applying for more debt than you can handle and avoid submitting too many applications for credit in a short time frame.
  • Check your credit report and dispute inaccurate information. Monitor your credit report on a regular basis to look for updated information.  
  • Use secured credit cards to establish credit when you’re having trouble qualifying for unsecured debt.

How long does it typically take to see improvements in my credit score when following debt management strategies?

Credit score change timelines vary depending on many factors:

  • The severity of your debt situation. The worse your debt situation, the longer it may take to see an increase. Untangling yourself from overwhelming debt can take time, and progress may be slow.
  • The state of your credit report. The more negative information you have on your credit report, the longer it can take to see an increase. Negative information can stay on your credit report for up to seven years, although it tends to have less impact on your credit score as time goes on.
  • Payment consistency. If you pay your bills on time every month, you can reach your credit goals faster. If you frequently are late on your payments and those late payments get reported to the credit bureaus, it will take longer to see an increase.

After a few months of consistently following good credit habits, you may start to see some positive changes to your credit score. But a significant rise in your credit score could take six months, a year, or longer.

Can consolidating debt positively or negatively impact my credit score?

Debt consolidation can have both positive and negative effects on your credit score:

  • Positive effects of debt consolidation. Consolidating your debt can simplify your debts into a single monthly payment and can potentially lower your interest rate. This can make it easier to make your payments on time and help save you money on interest, potentially freeing up extra funds for additional debt payments.
  • Negative effects of debt consolidation. Consolidating your debt often involves a hard inquiry on your credit report, indicating you have applied for a debt consolidation loan or credit card. This may cause a temporary dip in your score, but the effects should not be major or long-lasting.

Bottom Line

Establishing a strong credit score while effectively managing your debt is important for financial stability. While the concept is straightforward, implementing a plan to increase your credit score can prove challenging. You need to understand your existing debts, implement a strategy for debt repayment, understand the factors that make up a strong credit score, and start treating your debts in a way that positively impacts your credit.

Credit & Debt provides comprehensive support to help you navigate debt resolution. Financial coaches offer personalized guidance, educate you on effective debt resolution and how to reach your credit goals, empower you to make smart financial decisions, and match you with the best financial products for your needs. The ongoing support and assistance from Credit & Debt can help you identify the right ways to manage your debt as you work to establish your credit score and achieve your financial goals.  

Brian Acton

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