Key Points

  • Your Credit Score is a numeric indicator of how well you manage debt. It does not reflect your financial wealth or personal worth.
  • Your credit score is only one of the five primary elements to a sound financial wellbeing.
  • Eliminating debt can outweigh a temporary drop in credit score when done correctly.
  • Your credit score is only one factor to consider when choosing a debt relief strategy.
  • Weighing the short-term and long-term financial pros and cons is critical to putting the value of your credit score in perspective.
Why Your Credit Score is Preventing You from Becoming Debt Free

Credit is important because lenders use the data on your credit report, and the score calculated from these items, based on the information reported to your credit file to make lending decisions. It can also be a factor when applying for an apartment, obtaining insurance, obtaining new phone service, and changing utility companies.

While various businesses use your credit score to make lending decisions, in most cases, it is only one of several factors considered. When you show financial strength in other areas, this can offset the negative impact of a lower credit score. Maintaining good credit can make it easier to obtain a new loan; however, it does not directly measure your overall financial wellbeing.

Your credit score does not measure your personal or financial worth; it is only a three-digit number that summarizes how you have managed debt in the past.

What Your Credit Actually Reveals

Your credit file contains a record of debt repayment.

A detailed look at your credit report will reveal a list of current debts along with a 7-year (84-month) repayment history. The list includes mortgages, car payments, student loans, personal loans, and credit card debt. Your file may also contain items found in public records, such as judgments, collection accounts, bankruptcy, and other liabilities. Collection accounts can include medical debts, utility defaults, and other bills not typically reported in your credit file unless you fall behind.

The credit report also includes identifying information such as your address and employment histories, and each account’s credit limit or your highest balance.

What Your Credit Does NOT Measure

Credit reports do not measure financial net worth, tabulate assets you own, or make a statement about your income. It does not reflect the equity you have in your home or assets established in retirement accounts. The file does not describe your position at work or provide any details on a recent family crisis or period of unemployment.

The Five Major Elements to a Sound Financial Wellbeing

Focusing on Long-Term Financial Health

Building long-term financial health requires a plan that allows you to make decisions today that improve your overall financial wellbeing. Often these decisions involve short-term pain and sacrifices to achieve a higher objective.

For example, you might need to forgo a family vacation or make deep cuts in spending to beef up retirement accounts. You might find it better to accept a temporary decline in your credit score to eliminate debt faster.

When you carry high credit card balances or max out your lines of credit, your credit score suffers because it produces a high utilization rate, which is 30% of the total score. On-time payments are the only factor with more importance at 35% of the overall rating. High debt levels can damage your credit score and financial health, preventing you from building financial stability due to double-digit interest rates.

Taking steps today to reduce debt balances in an efficient manner could lead to a temporary drop in your credit score, followed by a relatively fast recovery as you eliminate debt balances.

Why Your Credit Score is Less Important Than You Think

Your credit score mostly impacts your ability to borrow money. When you do not anticipate making a large purchase, such as a home or a car in the next few years, your credit score will have less of a bearing on your daily life.  However, carrying high amounts of credit card debt or other high interest loans can rob you of future savings for retirement, funding your children’s education or saving for unanticipated emergencies.


  • How does debt affect my credit score?

    Credit scoring companies like FICO calculate on-time payments and credit balances in relation to your credit limit as the top two factors. Your credit utilization ratio makes up 30% of your credit score. The closer your credit balances are to your credit limits, the more negatively it impacts your score.

  • How will paying off debt affect my credit score?

    Credit scoring agencies use five key factors in calculating your credit score. On-time payments and debt levels are the top two representing 35% and 30% of your credit score, respectively. Paying off debt lowers your utilization ratio improving your credit score.

  • How do late payments affect my credit score?

    Late payments will temporarily lower your credit score. The amount depends on your credit history before making the late payments. Negative marks remain on your credit report for seven years and have less impact on your score as time passes.

  • Should I care about my credit score?

    Good credit will make it easier to meet the requirements for new debt. It can also lead to lower fees and reduced interest rates on new accounts. Some businesses like landlords, insurance companies, and utilities, check credit before making application decisions.