CNBC Select may receive an affiliate commission when you click on the links for products from our partners. Click here to read our full advertiser disclosure.
Advice

Having a lot of debt won't necessarily hurt your credit score—but here's what to look out for

Your amount of outstanding debt may not have a direct impact on your credit score, but your ability to pay it off does. CNBC Select breaks down what to look out for when carrying debt.

Getty Images

Lots of us have misconceptions about how debt impacts our finances, especially when it comes to our credit score.

A 2019 Experian survey found that 80% of consumers believe that having high debt hurts a person's credit score and assume that people with the highest scores carry the least amount of debt.

Yet, data from Experian shows that, in fact, those in the lowest credit score range actually have the least amount of debt.

People with credit scores from 300 to 579 carried $38,324 in total average debt, or less than one-third of the total debt carried by consumers in the top credit range. Meanwhile, people with excellent credit scores had the highest average total debt, carrying $136,801.

While Experian's data might seem to suggest that you need to be in debt to have a good credit score, be careful not to jump to this conclusion. We spoke to Bill Fay of Debt.org, who cleared up what the key factor is to achieving excellent credit no matter what amount you owe.

"Attempts to pad your credit score by increasing debt are cosmetic and can turn ugly in a hurry if you don't make on-time payments," Fay tells CNBC Select. People who have good credit scores and a lot of debt are likely in that boat because they have a good mix of loans and credit products — not just a high dollar amount. And of course, they make all of their payments on time.

Having a mix of credit helps your credit score

The most creditworthy consumers don't have high scores because they are in debt; rather, it's because they likely have a variety of different credit products, such as credit cards and installment loans like a mortgage, that add up.

Consumers don't get rewarded for carrying more debt, but their credit mix, which makes up 10% of their FICO score, gets a boost when lenders see that they can manage repayment on various types of debts. But above all, being a reliable borrower is most important, Fay reminds us.

"The primary factor in your credit score always will be on-time payments, regardless of how much you owe. Pay every bill on time, every month and you'll be rewarded with a healthy credit score," he says.

Just one late payment on one of your debts can set your credit back.

Repayment on your debt helps your credit score

It's also critical that you keep your credit card balances low in order to have the best credit score.

When it comes to your revolving credit, such as credit cards, a low balance keeps your credit utilization rate (how much credit you use) at a reasonable level — assuring lenders that you don't spend beyond your means.

Repayment on your loans also prevents interest from accruing, especially on credit card debt since you only accrue interest if you carry a balance. And, the longer you are in debt, the more interest you pay over time.

"Paying off debt is always a good idea, as you typically have to pay interest on any debt you have," says Amy Thomann, head of consumer credit education at TransUnion, one of the three main credit bureaus. "Repayment also signals to lenders that you're a responsible borrower and can lead to greater financial freedom."

To take control of your debts, start by pulling your credit report for free at AnnualCreditReport.com to see just how much you owe. And as you make your monthly payments, you can easily keep track of your credit score by signing up for a credit monitoring service. CNBC Select ranked our favorites, and those that made the list include CreditWise® from Capital One for the best overall free service and IdentityForce® for the best overall paid service.

Bottom line

No matter how much you owe in debt, don't confuse having debt with having a good credit score.

Rather, understand the difference between adding more debt and adding different kinds of debt. Never get into debt you can't afford just to try and raise your score. Borrowing beyond your means is perhaps the fastest way to make your credit score plummet.

To learn more about IdentityForce®, visit their website or call 855-979-1118.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the CNBC Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.