What Happens If You’re Deep in Debt But Still Have Good Credit?
- Having a high credit score doesn’t always mean you’re not struggling with money.
- Being deep in debt makes it hard to accomplish your financial goals.
- Rebuilding your credit isn’t too hard, so don’t let fear of a lower credit score prevent you from considering debt relief options like debt settlement or bankruptcy.
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If you have a friend with a good credit score (for a FICO Score, that’s 670 or higher), you probably assume they’re great at managing money and don’t worry about debt, right?
Don’t be so sure. I used to have a lot of unsecured debt—and a credit score in the 700s. Here’s how that happened, and how I turned my finances around.
Spoiler alert: I’m in the camp that says that if you’re in a debt hole like I was, your credit score shouldn’t be at the forefront of your mind. Rebuilding your credit over time tends to be a lot easier once you’ve got a better handle on your finances and put some of your bills behind you.
Deep in a Debt Hole with Good Credit
How do I know your credit score isn’t always a mark of how good your finances are? Because I was in a debt hole of my own, and sacrificed time and energy to get out of it.
As a young adult, I took some well-meaning but ultimately bad advice and bought a house, and my life took a turn just two years after I moved in. Long story short, I ended up stuck with a home I couldn’t afford, in a city I wasn’t going to live in long-term. I was able to talk my mortgage servicer into a short sale. A short sale is when the lender agrees to let you sell a home for less than what you owe on the mortgage. Ideally, the lender then forgives the difference (but that part isn’t guaranteed).
I had the opportunity to get out from under the loan—but with significant credit score damage, from both the missed mortgage payments and for settling a debt for less than I owed.
In the wake of the short sale, I vowed never to make a late payment again if I could help it. And I didn’t. It’s been more than a decade since I made a late payment on a credit account. Payment history is the biggest factor in a credit score, and paying on time helped me rebuild mine. No sugarcoating: rebuilding my credit took years.
For most of those years, I still struggled with money, relying on credit cards to be my emergency fund while I held low-paying jobs and chipped away at my student loans. When I changed careers during COVID-19 and decided to do something about my finances, I had about $25,000 in unsecured debt and a credit score over 700 (a good credit score).
Here’s How I Got Out of My Debt Hole
I was very fortunate to have increased my earning potential by changing careers and becoming a fully remote worker. Since I didn’t need to worry about commuting, it was easier to fit in freelance work on top of my day job. I tackled my own DIY debt payoff plan—the debt snowball.
I had a few small loan and credit card balances, and I started by paying off those. Eliminating those bills gave me a rush, and I was soon building a bigger snowball as I tackled bigger balances. Within seven months of starting my debt snowball, I was entirely out of debt, and had also added 100 points to my credit score.
My payment history had remained stellar, but now I had a credit utilization ratio that hovered around 1% or so, depending on when during the month my creditors reported my balances to the credit bureaus. Credit utilization is how much you owe, compared to your credit limit.
Credit utilization has a heavy influence on your credit score.
Addressing Your Debt Could Naturally Lead to Good Credit
You can see how, on paper, having a good credit score might make it look as if your finances are in good shape. But all those years I lived paycheck to paycheck with growing debt, my finances suffered. I was lucky to dig out of my debt problem the way I did.
You’re probably familiar with how money problems can build on each other. If your car breaks down and you can’t afford to fix it, you might struggle to get to work. If you can’t get to work, you could lose your job, and be unable to afford your bills.
This chain of events can happen to just about anyone. About two-thirds of American adults live paycheck to paycheck. That means one financial emergency can cause a cascade of negative financial consequences. Ultimately, addressing your debt should be your main goal to get out of this cycle. If you can’t increase your income and do your own debt payoff plan like I did, you have other options.
Debt Relief Might Help You
If I hadn’t been able to pay off what I owed, I could have sought help in the form of debt relief. Debt settlement and bankruptcy are debt relief options that have a significant negative impact on your credit score. That’s because both involve getting rid of debts for less than you owe.
But it’s not as hard to rebuild credit as you might think.
Once you’re free of your debt (and sleeping better at night), you can work on your credit score. What you don’t do is as important as what you do.
Do:
Pay bills on time, every time
Avoid credit card debt
Avoid applying for new credit accounts unless absolutely necessary
Keep old accounts open
Don’t:
Pay bills late
Take on credit card debt
Apply for credit when you don’t genuinely it
Close old accounts, especially if they’re not costing you anything
Pro tip: Although you get credit score points for having different kinds of credit accounts, like student loans, car loans, and credit cards, don’t apply for a new account just to get points in this category. You won’t need to. Over time it’s possible to build good credit through natural financial behavior that meets your needs. You don’t have to force it.
Consider asking a trusted friend or family member with good credit to add you as an authorized user on one of their credit cards. Apply for a secured credit card to build your own positive payment history. And most of all, be patient.
Over time, if you use credit in ways that support your goals, you could see your scores improve. And you’ll get the debt-free second chance that I got.
Author Information
Written by
Ashley Maready
Ashley is an ex-museum professional turned content writer and editor. When she changed careers, she was finally able to focus on turning her financial situation around. She went from deeply in debt to homeowner in two years. Ashley has a passion for teaching others about better living through better money management.
Reviewed by
Kimberly Rotter
Kimberly Rotter is a financial counselor and consumer credit expert who helps people with average or low incomes discover how to create wealth and opportunities. She’s a veteran writer and editor who has spent more than 30 years creating thousands of hours of educational content in every possible format.
How much total debt is too much?
This depends on your situation. Ideally, you should be using a low percentage of your available credit (under 30% at most). Also, your debt payments should not take up too much of your gross monthly income—no more than 43%—and of course, lower is better.
What is the difference between secured and unsecured debt?
Secured debt is guaranteed by something valuable (collateral) that you agree to give up if you can’t repay the debt. Car loans and mortgages are secured debts. If you default on the loan, the lender could sell the collateral to get the money you owe.
Unsecured debt is a loan that you qualify for based on your creditworthiness. The risk to the lender is that if you don’t repay the debt, the lender is stuck with the loss. That’s why unsecured loans tend to cost more than secured loans.
Is debt relief the same as bankruptcy?
No. Bankruptcy is a matter of public record. Debt settlement is a private process. But debt relief and bankruptcy are similar in some ways. They can both result in you paying less than the full amount you owe.
About half of Chapter 13 bankruptcies result in full payment, plus bankruptcy and attorney fees. That means those people would have paid less if they had never filed for bankruptcy. So if you don’t qualify for Chapter 7 or you don’t want to lose assets, debt relief might help you more than Chapter 13.
Chapter 7 bankruptcy typically takes a few months. Debt relief usually takes two to four years. Chapter 13 bankruptcy takes three to five years.