Looking Through a Lender's Eyes

Debt Affects Your Credit ScoreThe only thing standing between you and that personal loan, credit card, car, job, apartment, or house (okay, so let's just say it's the only thing standing between you and everything you need in life) is your credit report – but do you know what they are seeing? Each item on your credit report has 10 different elements, and with the exception of 3, all of them can either help or hurt your chances of getting that picket fence dream. To find out how you look through a lender's lens, let's take a walk down credit report lane.

Video: Surviving the Mortgage Meltdown

The Three Types of Debt

“Installment” debts are paid monthly in equal amounts for a fixed period of time, such as mortgages and auto loans. You can identify an installment debt by the “account type” and “current status” elements on your report, either spelled out or abbreviated by an I. Most credit cards, on the other hand, are “revolving” debts, or a fixed maximum credit from which you borrow, and pay depending upon your current balance, with the remainder rolling over to the next month. Revolving debts are indicated by an R in the “current status” element. An “open” debt is an infinite credit line which you pay in full each month, such as American Express credit cards and cell phone bills. These are indicated with an O in the “current status.”

Determining Your Ability to Pay

Video: Taking Charge of Your Credit Score

Lenders use how much you owe and how much you have to pay each month to figure out if you can afford the loan or line of credit. How much you owe, in total, is called your aggregate debt. Lenders use your most current balance (usually from last month's update) on all cards and loans to calculate your aggregate debt. In terms of how much you pay each month, lenders are most concerned with how much of your current credit is being used, also known as your utilization rate. To determine your utilization percentage rate, you just divide how much you currently owe on each card by your maximum credit limit. They also use your minimum monthly payments against your income to determine financial viability too. Finally, lenders take into account how many accounts you have with a balance owed. So if you have an auto loan and two credit cards with a balance that would be a total of 3 accounts with a balance.

How it All Comes Together

Overall, the types of debt you have don't affect your score as much as payment history. However, your aggregate debt makes up 30% of your score, so be sure to get and keep your utilization rate low. A good rule of thumb is to pay down your credit cards below 30%, but don't close them or let them close from lack of use – again, that payment history needs to be preserved. If you're having a hard time paying down your credit cards, you can try to have your credit limits increased, or get a new card to take off some of the extra weight. The closer you can come to a 30% or better utilization rate every month, the higher your score will climb, and the same applies for “open” accounts too. For installment debts, just make sure you make those payments on time.

More Resources

Consumer Credit Counseling Service Of Los Angeles
(800) 750-2227

National Budget Planners Of South Florida
(954) 785-8618

Auriton Solutions
(877) 322-8777

Tides Foundation
(415) 561-6400

Commonwealth Catholic Charities
(804) 285-5900

IFMC Down Payment Assistance
(386) 668-3636

Blue Haven Capital LLC
(630) 588-3800

Family Debt Arbitration
(603) 483-0593

S C Ministry Foundation
(513) 347-1122

Mass Housing Investment Corporation
(617) 850-1000

Cape Ann Commercial Fishermans
(978) 283-2959

JP Morgan Investor Service CO
(617) 557-8000

Patient Financial Concepts
(973) 396-2668

Clinton Global Initiative
(212) 710-4400

Consumer Credit Counseling Service
(505) 884-6601

ClearPoint Credit Counselors Solutions
(800) 737-2933 800

Family Foundations
(904) 396-4846

Solidary Credit
(305) 406-0188

Global Financial Partners Inc
(813) 261-5116

Financial Supervisory Service
(212) 350-9388

Chautauqua Opportunities Inc
(716) 664-4999

Greenpath Debt Solutions
(574) 293-0075