Debt Becomes You

When did debt become a badge of honor? Ever since those with more of it could brag about having higher credit scores.

It's true: The one-quarter of the population that carries more debt than the national average (around $11,000) has nearly 20 points on its less-indebted peers. In three separate studies of 3 million consumer profiles each, the Experian National Score Index looked at how general debt, mortgage debt, and car loan debt affected credit scores.

Experian found that the bigger the debt, the higher the score. Frugal folks with less debt than average are "rewarded" for their restraint with a 24-point handicap, according to the company, which uses a scale of 330 to 830. The penny pinchers have an average overall credit score of 671, compared with 695 for their spendthrift peers and 677 for the nationwide average.

Before you give your credit cards a workout at the Mall of America to "boost your score" (that excuse won't fly with your spouse, anyway), consider the underlying factor that's responsible for the increase: You have to carry more debt.

Mortgage debt gives the largest credit-score boost. Consumers with at least one open mortgage have an average credit score of 716. Those with at least one open car loan, on the other hand, see a smaller spike to just 683.

How much debt are we talking about for a few handfuls of points? The average U.S. mortgage is around $136,000 (10% of consumer home loans exceed $250,000), while the average consumer finances a car for $23,143 for a monthly payment of $383. The difference between the two is that mortgage debt is considered "good debt" -- a home is an asset that goes up in value over time, plus there are some tax benefits to taking a loaner to pay for your pad. Going into hock for a car -- the classic "depreciating asset" in finance-speak -- could be a sign that you're buying more car than you can afford. Plus, the darn thing is almost always worth less than what you paid by the time you hang the fuzzy dice from the rearview mirror.

Despite the concentration on the debt numbers, the real takeaway is that merely qualifying for loans indicates that a consumer is a pretty good credit risk. Those with really lousy FICO scores have a hard time getting mortgages or car loans (at least decent ones) in the first place. But those who do have these debt obligations have to be that much more careful about properly managing them. As they say: The higher you climb, the farther you have to fall.

Or, try the more bumper-sticker ready: "More debt? More ways to mess up!" A single late payment on your auto loan drags that 683 average credit score down to 596. Three months behind on the bills? You're looking at 574. And should the repo man come knockin' (as he has with 1.5% of the population), we're talking a credit score of 5 and change -- even lower than the average score of someone who has a bankruptcy filing on his or her report.

Do you have a stellar reputation with your banker? A FICO score that's flawless? If you have a perfect credit score -- and about six of you reading this do -- there's $1,000 in cash and a lifetime of free credit-watch services with your name on it. During February, the consumer arm of TransUnion is searching America for the perfect credit score. Find out instantly whether you're in the running.


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