The Correlation Between Debt and Credit

I was on CreditKarma this weekend and was looking at my credit score. One of my favorite features of CreditKarma is that it shows how your credit situation compares to others.

The “report card” feature shows the important factors in a credit score, tells you how important each is for your credit score, your situation, how you compare to others, the average credit score for each group, as well as a few other metrics to show how meaningful that factor is in comparison to others.

I really love this feature because while a 706 might be just a score, we can take a closer look at our situation, find where we can improve, and take action to improve certain areas.

What I found interesting was that correlation between the factors and credit scores. For the most part, it was not surprising. They have graphs showing that people who make more on time payments have better scores that people who do not. The more times we miss, the more our score will suffer. Makes, sense, right?

Well, once fact that I found surprising was that there was no correlation between certain factors and credit scores. My favorite example is the graph showing the average credit score based on the amount of debt owed. Those with no debt average a 696 credit score, while those with $1-5,000 of debt average a 677 score and those with $5,001-$49,999 of debt average a 640 credit score. (the orange bar is where I fall)

Then, the trend reverses. At $50,000 and above, the more debt accrued correlates to a higher credit score. Actually those with over $150,000 in debt have an average credit score greater than those with no debt!

Why? I have no idea (maybe too small of a sample size? I think they only take into account people who have used CreditKarma). But if you know, leave a comment below!

Readers, do you find this feature from CreditKarma useful? Does it gives you a better idea of your credit situation?

The Correlation Between Debt and Credit

Sweating the Big Stuff Staff

8 thoughts on “The Correlation Between Debt and Credit

  1. I guess I fall in the $150K range. I own a home. However, I have no consumer debt.

    It’s amazing that you have to stay have a lot of debt to have a higher score. The law should be the less debt you have, the higher your score should be.

  2. Hi Daniel,this sounds interesting. Credit score was supposed to be inversely proportional to debt amount. Then why is this anomaly? More recent delinquencies hurt your credit score more than those in the past. Is there a possibility that the people with higher debts have accrued them a lot earlier and are recovering now? The relative change affects credit score. This may be one reason.

  3. Part of your score is determined by how much credit banks are willing to lend you. So the score must be factoring this in more than on-time payments. However, when I researched how credit scores are calculated, 35% is based on payment history, 30% is based on how much debt you owe (want to keep that debt to credit availability ratio under 30%) and only 10% on the kinds of loans you have. 15% is based on length of history, so maybe people that have more debt have had credit a much longer time. I’m just guessing here.

  4. I believe the answer is home ownership. People with more debt are more likely to be home owners and that high debt amount is mostly mortgage. I would be interested to see a trend in these numbers over the last few years. As we’ve seen a dramatic increase in foreclosures I would imagine that the averages have shifted in some of the areas because of this.

    1. @Evolution Of Wealth, That’s really interesting. If you’re buying a house, you’re more likely to be responsible with your credit. And at the same time, you’ve got this huge mound of debt.

      After all, who would be willing to give someone with a lot of consumer debt another loan?

      1. @Daniel, when it comes to loan money or opening up lines of credit, the bank (or entity offering it) is going to way risk. A mortgage is collateralized (is that a word?) debt. There is a lot less risk involved because they could foreclose on the house and get some, all or in some cases make more money on doing so. From a lender prospective this is going to be looked at and weighed differently than say a credit card or personal loan (without collateral).

        Who are the people you know with the best credit? They are most likely homeowners. They might not have any other debt. If you look at ways to boost credit scores it is through making payments on multiples lines of credit. They pay their mortgage on time every month, maybe pay off car loans, credit cards, etc. If they are responsible it’s easier for someone with a lot of debt to boost their credit score than someone with little to no debt.

  5. EOW makes a good point about home-ownership. Interesting look into this correlation – Generally though, the less debt you have the more freedom you have to not worry about your credit score.

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