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Here’s What Your Credit Score Says About Your Debt

July 7, 2024

3 min Read

Written by Andrew Lisa

Edited by Gary Dudak

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Thanks to the Fed’s rate-raising spree, which the Central Bank initiated to curb inflation, borrowing money has become much more expensive in recent years. And, perhaps unsurprisingly, borrowers’ credit scores are reliable indicators of how much debt, and what kind of debt, they’re likely to hold.

A recent Experian study on consumer debt sheds light on the relationship between debt and creditworthiness. The results show that your score says a lot about your debt and your debt says a lot about your score.

Good Credit Fueled Much of the Recent Borrowing Bonanza

America’s consumer debt increased by 4.4% last year, from $16.38 trillion in 2022 to $17.1 trillion in 2023. Most of that debt is secured by assets that typically require stable credit to attain. For example, $11 trillion of that balance is tied to mortgage loans, which are backed by real estate. Another $1.5 trillion is for auto loans, which are secured by the vehicles they finance.

According to Quicken Loans, most lenders require a score of at least 640 for mortgages and Lending Tree says most approved car buyers have scores of 660 or above. In short, if you have asset-backed debt, you probably have at least a decent credit score.

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Those With Good Credit Have More Borrowing Power — and They Use It

According to the Experian report, “Consumers with poor credit have far less overall debt than consumers with better credit scores.”

Those with strong credit profiles that are attractive to lenders tend to take on debt deliberately as part of a larger financial plan — buying a home or leasing a car, for example. Not only are they more likely to be financially stable, but high-credit borrowers get the lowest rates and most attractive terms, which further increases their borrowing power.

Low-Credit Borrowers Are Taking on Debt Much More Quickly

While high-credit borrowers hold far more overall debt, the balances of those with poor credit have “increased significantly from 2022 — more than 20%,” according to the Experian report.

The study notes that those with poor credit typically don’t borrow deliberately as part of a larger financial strategy, but out of necessity. In other words, they simply can’t afford the rapidly rising cost of everyday necessities without going into debt.

For most, it’s a double-edged sword.

The report states, “Borrowing costs for these consumers were already high when the year began and were only ratcheted higher as interest rates climbed. More of these consumers also owe additional fees due to falling behind on credit payments.”

Here’s the breakdown of how total average debt balances have risen during the era of high inflation by credit score: