Credit Card Debt and Your Credit Score: Understanding the Impact

Life is full of competing financial interests. Say you recently put a somewhat pricey (but totally worth it!) gym membership on your credit card, and now you’re thinking about buying an electric vehicle. Could your commitment to leg day lead to heftier interest rates on your car payment? 

If you’re curious about how credit card debt affects your credit score, it’s true that the higher your credit card debt climbs, the lower your credit score tends to drop. In fact, credit card debt stands out as one of the primary factors that can heavily influence your overall credit score. 

Regardless of your income level, maxing out your credit cards sets off a warning signal for lenders. Whether you plan to get a new car, buy a home, or even just apply for another card, your existing credit card debt will directly affect the likelihood of approval and the interest rates offered. 

So, with this interconnected relationship in mind, we’re sharing tips for managing credit card debt and improving credit scores. We’ll even show you how your local credit union can help with credit card best practices and credit repair. 

Pros and Cons of Credit Cards

What is Credit Card Debt?

First things first, let’s define what credit card debt really is. Credit card debt is an unsecured liability through a revolving loan — meaning your debt is not backed by collateral, and your line of credit stays open as long as you make minimum payments. 

Unlike debit cards, credit cards do not pull from the money you already have in an account. Instead, they are small loans you promise to repay when your bill comes due each month. Missed or incomplete payments are where debts can start to add up. 

Principal payments, interest, and late fees make up the majority of credit card debt. In addition, credit card interest rates can range from 18 to 28 percent, quickly increasing the debt on overdue cards. 

Credit card debt tends to accumulate for the following reasons: 

What is a Credit Score?

A credit score is a numerical representation of your creditworthiness based on data from your credit report. Lenders view your credit score to assess how likely you are to pay back your loan on time based on past behaviors. 

Your credit report will typically include scores from the three main credit bureaus: Equifax, Experian, and TransUnion. Each reporting agency uses a different formula to calculate your score, so slight variations will exist between them. Your lender takes all into account when evaluating your creditworthiness. 

Credit scores range from 300 to 850. Scores above 670 are considered good, and scores above 740 are exceptional. If your score falls below 670, it may be time to assess opportunities for improvement.  

Factors that go into evaluating your score include: 

Why do all of these factors matter? Credit scores determine your interest rate and the amount of credit you can receive, affecting your ability to lease a car, take out a mortgage, or open a new credit card. In addition, poor credit scores could impact whether you qualify to rent an apartment or lead to costlier car loans and insurance premiums. So, improving your score as much as possible is in your best interest. 

Impact of Credit Card Debt on Credit Score

So, how does credit card debt affect your overall credit score? Credit scores factor in your bill payment history, length of credit history, new lines of credit, types of credit, and credit utilization rate — which are all heavily tied to how you use your credit cards. 

Let’s look at three of the most important factors: 

Tips for Managing Credit Card Debt

Reducing credit card debt is one of the best ways to improve your overall credit score. Here are a few strategies for paying off your debt and raising your score: 

How to Improve Your Credit Score

Reducing your credit card debt will naturally increase your credit score. However, there are a few additional strategies you can follow to raise your credit score: 

When you put in the work, your credit score can improve in around six months. Remember to stay on top of payments, reduce debt, and limit credit card spending to minimize your utilization rate. 

Credit Union and Debt Repair Programs

Credit unions and credit repair are compatible in many ways. For starters, most credit unions offer credit counseling and debt repair programs.

Credit counseling is a service that helps people in debt take control of their finances and create a debt relief plan through money management courses and other actions. 

Debt management programs typically consolidate debt under one lower-interest loan to reduce interest charges and streamline payments. 

Credit unions’ member-oriented approach means you can rely on your credit union financial advisor to have your best interests in mind. From credit-building products specifically designed to establish or rebuild credit to larger financial guidance that helps you see the connection between credit card debt and credit score, your local credit union has you covered.

Further Resources on the Impact of Credit Card Debt on Your Credit Score

Here are additional resources to help you take control of your credit card debt and credit score. 

The Winning Combo of Credit Unions and Credit Repair

Now that you know how credit card debt affects your credit score, you can focus on the best ways to reduce your credit card debt: pay more than the monthly minimum, pay on time, and reduce your credit utilization rate to 30% or below. Follow these tips for managing credit card debt and improving credit scores, and you'll soon see improvement. 

For further support in repairing your credit score, including opening a credit union credit card specifically designed to support building credit, use our Credit Union Locator Tool to find the local credit union nearest you.

Light Bulb for Did You Know YMF

Did You Know?

Did you know that credit unions can help their members build credit and increase their credit scores? Not-for-profit credit unions are member-run and typically offer credit card plans with lower interest rates and fees than you’ll find at for-profit banks.

Find the right Credit Union for you

There are more than 5000 credit unions to choose from across the U.S.