Reader Question – Does Paying Off Debt Lower Credit Scores?

A reader needs your help today. Her question touches on so many subjects we talk about here: Marriage and finances, credit, and paying off debt. Show her some support by letting her know how she can handle this delicate matter.

Currently I have $18,564.55 in total of consumer debt. My hubby has accumulated 3 times that with consumer, car loan and student loans. We want a house, and we are living with his parents until we can afford a down payment. My problem is that we’re not on the same page. I started a job recently and I’m planning to put away $1,000 in an emergency fund. After that, I will start my debt snowball. My goal is to get rid of the credit cards one by one, putting them at zero as much and as fast as possible.

However, when I talk to him about it, his view is that as long as we reduce every card to 30% of their limit, we will increase our score and we will be fine. His argument is that when they calculate our score and consider our debt to income ratio, a 0 to income will have a negative impact. No matter how he explains that being in debt partially is good, I don’t understand. My logic is that I borrowed money, I need to pay up. I feel like keeping a balance and paying interest is paying for stuff over and over again no matter how small the interest may be.

I’m very frustrated because I am convinced that he is wrong and he gets aggravated because he thinks I’m wrong. What can I do? Help.

Here Was My Response

Living with your parents are brave, and admirable. I know there must be some inconveniences but this moves seems to indicate that both you and your husband are willing to sacrifice in order for a better future. So with that said, I think both of you have the same goals in mind, and your husband is more of a saver than you think.

I assume your husband is talking about credit scores for purposes of buying a home, so here’s my take. If your husband has three times your debt amount, you two have accumulated about $75,000 in debt. That’s high under any circumstances, and will negatively affect the borrowing power when you two decide to apply for a loan. Generally, when an officer looks at loan applications, they will try to figure out your income and ALL your debt payments, and try to figure out whether the loan is affordable to you. Obviously, the higher your payments, the less you have available to pay the mortgage. Thus, the higher your debt, the smaller the loan you can obtain.

It’s true that showing the ability to handle different debts may increase your credit score, but in general, the higher your credit utilization rate (meaning, the higher your credit limit versus your debt), the better. Therefore, it’s still best to try to lower it. Your husband’s argument of having NO debt may negatively affect your score. That’s true, but it seems like you have quite some time before you can pay off everything. In your case, I will still suggest reducing your debt. If your husband feels uncomfortable to eliminate everything (his $0 argument), he can still maintain a small amount but $75,000 is not small by any stretch.

A good strategy to move forward from this deadlock between the two of you is to find a third person to discuss your finances with. If the third party is logical and responsible (perhaps a financial planner of some type), you can be sure that he will also suggest lowering your debts, even if he doesn’t want you to completely eliminate it. Another way is to keep executing your plan, and showing him how commitment to reducing your debt can really pay off. A third way might be to calculate how much interest he is actually paying every month with his loans. Once he understands how much of his payments are interests related, he may realize just how much money is wasted because of your family’s debt load.

If you follow my blog, you will realize that I’m not so “hot” on having debt at all. I just don’t buy the argument that debt is good. Saying debt is great as long as the borrower can bear the payments is like saying cancer is great as long as the medication can treat the patient. There’s a certain kind of freedom when you don’t have any payments to make. I hope that you and your husband will find a middle ground and be debt free sooner rather than later.

What Do You Think?

Sometimes, asking for help is the hardest step to make. This reader also agreed to put her story out in the public, which isn’t always easy either. Please help by offering your opinions. Be nice, and your efforts will help at least one person today.

Note: It dawned on me that there might be some of you who want to send me questions but think that I’m too busy to respond. So let me say this.

I love the interaction and helping out.

I may not be able to respond right away because the quantities of emails that come daily just get too overwhelming sometimes, but I love to help. I don’t claim to be an expert, though the nature of my business allows me to think and read about money matters much more than the average joe. If you would like a second opinion, someone to talk to or even the occasional advice, I’m all ears (or in our case, through email, I’m all eyes).

Many others email me all the time, and if you don’t want, nothing will be made public. So, if you have a burning question, reach me here.

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