Home > Credit 101 > Can I Be Debt-Free & Have Great Credit?

Comments 0 Comments

Credit and debt are not synonyms. This is important to know.

It’s understandable people confuse the relationship: It’s good to have a high credit score, and you need to use credit in order to have a score. Sometimes, using credit leads to debt. However, you do not need to have debt to have a credit score (or a good credit score, for that matter).

How to Be Debt-Free With Great Credit

Revolving credit is the key to a superb score without debt, so using a credit card, even if it’s not that often, is a good practice for building credit. You need some sort of plastic (for online shopping and hotel reservations, for instance), and while debit cards are an option many use to control their spending, debit cards don’t help you build credit, nor do they carry the same financial protections as credit cards.

There’s a misconception that you need to have debt in order to have a good credit score, says Gerri Detweiler, Credit.com’s director of consumer education.

“When you pay bills on time and you have little debt, that means you probably have a high credit score,” Detweiler says. Payment history and debt usage have the most impact on credit scores, so keeping debt levels low or nonexistent should be a huge positive.

Swearing off debt doesn’t mean ending your relationship with credit. Well, it depends on your definition of debt-free.

“If you have made a decision that you’re not using any credit, and that’s your version of debt-free, there are ramifications for that,” said Anthony Sprauve, FICO senior consumer credit specialist.

Those ramifications stem from the lack of a credit score, which makes loans difficult to obtain should you need to borrow money.

For the large chunk of consumers hoping to buy a house or a car someday, learning to use credit early and responsibly will help. You can build a solid, positive credit history with the use of one card, if you really want to be a minimalist. Keep in mind that mix of accounts play into your credit scores, so having only a credit card doesn’t do much there, but payment history and debt usage play a much larger part in that high score you’re aiming for.
“While it’s good to have a mix of credit, you should have at least one credit card,” says Rod Griffin, Experian’s director of public education. “It gives greater insight into how you make borrowing and repayment decisions.”

You choose how much to spend and repay with credit cards, whereas installment loans like auto loans and mortgages provide a set amount and tell you what must be paid each month. Paying credit card bills on time and in full conveys a certain sense of responsibility to lenders, which is why payment history and debt usage are so important.

The Debt-Credit Relationship

You can see how these components work together if you look at your credit scores, which you can do for free with the Credit Report Card — the category that says “debt usage” indicates how much of your available credit you use. Low or no debt translates into a better score, so you just need the available credit to make it work.

If you don’t like the idea of having to pay a credit card bill each month, you could go as far as paying the balance as soon as transactions show up on your card. Actually, if you have a really low credit limit, paying the balance more than once a billing cycle will help keep your credit utilization low, which also helps your credit scores.

“As long as you’re actively using credit, having little or no debt means you won’t run into any problems,” Detweiler says. “Carrying debt does not improve your credit score.”

More on Managing Debt:

Image: iStock

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team