Can You Have a Good Credit Score Despite High Levels of Debt?

Loads of debt can bring down your credit score, but that won't always happen.

There's a reason we're told to keep our debt to a reasonable level: The more you carry, the more it'll cost you in interest, and the longer it'll take to pay off. Not only that, but high levels of debt are often associated with poor credit, and the lower your credit score, the harder and more expensive it'll be to borrow money when you need to.

Then again, a lesson we can learn from baby boomers, folks in their mid-50s to mid-70s, is that a large amount of debt may not hurt your credit score that badly. According to Experian, as of late 2018, they carried an average total debt of $95,095, but still managed to maintain an average FICO score of 732 -- that's 31 points higher than the national average of 701.

How could this be possible? In the case of baby boomers, many are seasoned workers with high enough salaries or income levels to support the debt they've taken on. Additionally, high levels of debt and solid credit can exist simultaneously if that debt is managed responsibly. 

High debt doesn't have to kill your credit

The more debt you carry, the more you risk falling behind on your payments. And if you're late with your payments, or don't make them at all, your credit score could take a major hit. 

So if you have a lot of debt, the most important thing is to pay on time, which the baby boomers show us is possible. And as long as you do, it won't hurt your credit score. In fact, it might actually help it. Your payment history is the single most important factor that goes into determining your credit score, so the more payments you make on time, the more you boost that number.

Furthermore, high levels of debt won't necessarily hurt you if you have a high enough credit limit. After payment history, credit utilization is the second most important factor in calculating your score. Your utilization speaks to the size of the balance you are carrying versus your total credit card limit, so having a lot of available credit will lower that ratio.

Finally, you can maintain a good credit score with lots of debt if you have a diverse enough credit mix. Though your credit mix doesn't carry as much importance as your payment history and credit utilization, it's still a factor. And if you have a healthy mix of debts -- say, a credit card balance, but also a car payment, mortgage, and a personal loan-- it won't actually hurt your score the same way a mountain of credit card debt alone will. 

Lowering your debt

Even though it's technically possible to have lots of debt and a good credit score, many people will struggle with the latter if they're grappling with the former. And generally speaking, it always pays to keep your debt to a minimum, especially that of the credit card variety. You might manage to swing, say, $2,000 in monthly debt payments today, but if you lose your job or incur other expenses, you'll risk falling behind, and once that happens, your score could take a massive hit. Therefore, if you're currently in a lot of debt, make a plan to pay at least some of it off.

To do so, order your debts from least to most healthy. For example, if you have a credit card balance, auto loan balance, and mortgage, you'll usually want to tackle your debts in that order -- especially since, chances are, you're paying more interest on your credit card than on your auto loan, and more interest on your auto loan than on your mortgage.

Now to pay off debt, you'll need extra money, so cut back on expenses in your budget, get a side job on top of your regular one, and whenever extra cash comes your way, whether in the form of a birthday gift or a bonus at work, stick it in savings and use it to pay down those balances. Even though you might manage to avoid harming your credit score while carrying debt, your best bet is still to owe as little money as possible.