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More debt isn’t always a bad thing

09:31 PM CST on Sunday, January 30, 2005

By PAMELA YIP / The Dallas Morning News

Credit experts have long preached about the dangers of carrying too much debt and the damaging effect that could have on your credit score.

That’s still true, but think about this finding from a study by Experian, one of the three major credit bureaus:

Consumers with more debt than average tend to have better credit scores than those with less debt.

The study found that U.S. consumers shouldered an average debt of $11,224 last October, up 12 percent from October 2003. Nationally, the average credit score calculated by Experian was 677. The range is 350 to 850.

According to Experian, 25 percent of U.S. consumers have debt that’s above the national average, and their average credit score is 695.

For consumers with debt below the national average, the average Experian score is 671.

“A lot of people really think that debt is automatically a bad thing,” said Arlene Dang, manager of analytics at Experian. “What we’ve found is as long as you manage your finances well and you don’t overspend beyond your limit, it’s not necessarily a bad thing.”

A little context

Let me be clear: This is not a recommendation to go charge up your credit cards to raise your credit score. You have to put the Experian numbers into context.

First of all, your credit score doesn’t take into account your income, which is a crucial factor, because how much you earn has a direct bearing on how much debt you can carry.

Nicole Lowe, a credit education specialist at TrueCredit .com, which provides online consumer credit products, offered this example:

Consider a consumer who makes $1 million a year and has a $50,000 balance on a credit card with a $200,000 limit.

First of all, he has more than enough income to manage a $200,000 credit line.

Second, he’s using only 25 percent of his credit limit. Credit experts say you shouldn’t use more than 50 percent of your credit limit.

“In reality, he’s managing his money very well, and he’s going to have a great credit score,” Ms. Lowe said. “It’s a matter of managing the limits you have.”

Just one factor

The Experian study didn’t look at income – just the information on a person’s credit report – and Ms. Dang said debt was only one factor that affected the credit scores.

“These are the types of individuals who have proven themselves,” she said. “They have high debt because their good credit history has given them the opportunity for access to their credit. They’ve paid their bills on time, they’ve managed debt well.”

Paying bills on time can’t be stressed enough. You should have a history of at least six months of on-time payments.

“Delinquency is the most heavily weighted factor that affects your score,” Ms. Dang said. “Debt also has an effect on your credit score, but other things matter, such as the type of debt and your credit history.”

Remember that Experian’s study dealt only with averages.

“At the individual level, higher debt may have an adverse significant effect on a particular consumer,” Ms. Dang said. “They have to look at their individual situation to see if, in fact, carrying more debt would be good for them.”


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