December 24th, 2008
No Debt Does Not Mean Good Credit
For many US consumers, it is a common misconception that if you have no debt then you must have good credit. Several of our members write comments with that assumption every week or ask if the system is broken because their credit score is not excellent even though they carry no balances.
The simple answer is that debt is only one component of the credit scoring system. (There are over 200 variables that go into your credit score.) You have to remember that a credit score is supposed to tell lenders how likely you are to default on a loan. If you have no debt, you are probably less likely to default, but from a statistical perspective, you are even less likely to default on a loan if you have no debt and you have had access to large amounts of credit for a long time.
That is the simplest of reasons why credit scores are not necessarily tied to debt. With that said, carrying too much debt is definitely a bad thing as it could affect your ability to pay them all back. If you have no debt and want to improve your credit score here are a few tips:
- Have Credit Cards. Consumers with good credit have 3-6 credit cards on average. If you need additional cards, make sure you apply for no annual fee credit cards. Having and managing your access to credit responsibly is an easy way to show lenders that you do not abuse credit and that you can pay bills on time.
- Use Your Credit. It generally does not make sense to pay interest or fees just to boost your credit score, but using your credit cards regularly and paying in full helps develop a histoy of on-time payment. Buy a tank of gas once a month or use your credit to pay for groceries, pay your bill in full and build your credit profile with positive activities.
- Use Different Types of Credit. Credit is a great thing if used responsibly. Auto loans, mortgages, and home equity loans are another way to help build your breath of credit experiences. Now don’t get one just to increase your score but realize that it is not bad to have these types of tradelines on your credit report.
- Have a Long Credit History. Keep your oldest credit card account open assuming there are no fees. A long history of credit is a great way to show lenders that you are responsible with your credit.
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