Much like no news is good news, no debt is a good thing. But what happens to your credit score when you donâ€™t have debt? The answer is complicated. The short version is no debt can pose a challenge to someone looking to land an excellent credit score.
Credit scores are intended to report your credit risk. In other words, they reflect how you have handled debt in the past. But having a high credit score is more complex than simply carrying debt. Understanding the factors that impact your credit score are important. There are many different strategies you can use to increase your score. [Spoiler alert: Going into debt simply to boost your score should be your last resort.]
What Factors Impact My Credit Score?
A combination of factors creates your overall credit score. Payment history has the biggest impact on your score and recent credit has the smallest. Learn more about what each factor is to see how it shapes your overall number.
Payment history is the single most important factor in your credit score. Remember credit scores are intended to show your trustworthiness with credit. Someone who never made a late payments or who has a history of very few late payments is likely to be much more trustworthy than someone who has never paid a bill on time.
Simply put, this is the amount you currently owe. Your mortgage or student loans will impact this, but the biggest impact comes from credit cards. Companies who create your credit score base part of it on your credit utilization. In other words, the amount of credit you have access to overall and how much of it you are currently using. Someone who has maxed all of his or her credit cards is going to score a lot lower than someone who pays the balance in full each month.
Length of Credit History
Aging is a good thing, at least when it comes to your credit history. Your credit score is influenced by the age of your accounts. In addition to considering how long you have had your oldest account, other factors including the age of the newest account and how recently you have used your accounts all play a role in this part of your credit score.
Credit Mix and Types
A smaller portion of your credit score comes from the combination of debt you have carried in the past. Loans paid in installments, such as student loans or mortgages, are one type of debt. Revolving credit comes from credit card accounts. Typically, people who have demonstrated a responsible history with a mixture of credit types have higher credit scores.
If you have recently applied for a line of credit, creditors make a hard inquiry when they receive your credit file. These hard inquiries can actually stay factored into your score for up to two years. Out of all the factors that shape your credit score, recent credit plays the smallest role.
How Does Not Having Debt Influence My Score?
Now that you know which factors influence your credit score, it becomes clear debt does play a part. Someone who has never had a student loan or hasnâ€™t had a mortgage will not have a history of installment loans. As a result, your credit score will likely be lower based on the credit mix and types factor that rewards a variety of debt repayment.
While we tend to talk about credit in terms of either good or bad, people can have no credit as well. This might be the case if in addition to never taking out any installment loans, you also do not have any credit cards. Rather than having a bad credit score, you simply may not have any credit history. Overall, it is fairly uncommon for adults to have this issue, though it is something that teenagers are likely to face.
What Other Ways Can I Boost My Score?
It is true that you could take out a small personal loan and quickly repay it to boost your credit mix if you have only carried revolving credit. However, going into debt simply to boost your credit score is not your only option. In fact, because credit mix and types play such a small role in your overall score, it should probably be a last resort. There are more effective strategies that donâ€™t involve taking on my debt that can boost your credit score:
- Check your credit. You canâ€™t solve a problem that you canâ€™t see. Requesting your own credit report is not a hard inquiry, so it will not count against your current credit score. By reviewing your credit score, you can determine which factors you should focus on first. It can also help you spot identity theft.
- Pay your bills on time. Every bill, every month. Since this is the most important factor in your credit score, there is no more effective way to boost your score than to pay on time.
- Request an increase in your credit limit. If you already have a credit card or several, requesting an increase gives you access to more credit. Continue to pay your bills in full so your credit utilization ratio improves.
- Be thoughtful with new credit. Hard inquiries impact your recent credit. This does not mean that you should never apply for a credit card or a take out a loan; instead, you need to choose wisely. Instead of applying for a handful of credit cards at once, apply for the best fit. Make sure that each credit application, whether it is revolving or installment, serves a legitimate purpose.
It is important to remember that credit scores are not created instantly. As a result, any efforts to boost your credit score will happen over time.
Credit Scores and Debt
The idea of no debt being anything other than something worth celebrating is confusing and maybe even paradoxical. However, no debt can impact your credit score. The good news is there are plenty of strategies you can use to boost your credit score without taking on debt.
How to Improve Your Credit Score
How Your Credit Score Impacts Future Financial Goals