Home > Credit Score > Is Being Debt-Free Always a Good Thing?

Comments 0 Comments

Is Being Debt-Free Always a Good Thing?Is being debt-free always a good thing? Seems like a silly question. Kind of like asking if being healthy is a good thing.

Living without a lot of unmanageable debt is obviously a great financial position to be in, but we get a number of blog comments from readers who think that credit scores punish people who choose to be debt-free.

  • Sounds like punishment for not being in debt. So glad I got rid of all those credit cards…. -D
  • My credit score: Cash only. -N. PA
  • You can’t win with FICO scores, especially if you remain debt-free and live beneath your means. -Codeine P

And they aren’t alone, as even some high-profile consumer advocates preach that credit scores discriminate against people who choose to remain debt-free.

The fact is, the facts aren’t on their side. Studies going back more than 20 years, using tens of millions of consumer credit reports to identify predictive consumer behavior, have consistently found that lower amounts of consumer debt lead to reduced credit risk.

[Related Article: The First Thing You Must Do Before Paying Off Debt]

Free Credit Check & MonitoringWhile having zero percent credit utilization (revolving balance/limit ratio) and all loans paid off won’t necessarily guarantee the highest possible scores — many other factors also go into a credit score — a credit report absent any debt or late payments can easily be expected to deliver the kind of credit score that will qualify for some of the best rewards programs available — which saves you money.

The following frequently asked questions, and their answers, address the issue of whether you can remain debt-free and at the same time have a good, or even great, credit score:

Q: Do you have to owe money to have a good credit score?

A: No. In fact, credit scores look very kindly on credit reports containing nothing but credit cards and loans with zero balances — and spotless payment records — as long as one or more cards remain through at least occasional use.

Q: Do your credit accounts have to be active to have a score?

A: While scores don’t like to see a lot of debt, they do like to see some amount of credit use, or “activity.” With cards, the more frequently they are used, the less likely they are to be closed due to inactivity by the card issuers.

Q: Do you have to have a credit card to have a good credit score?

A: No. While a well-managed credit card or two can definitely contribute positively to your score, without a credit card, a good credit score can still be built using any type of credit that’s reported to the credit bureaus, such as loans, home equity lines of credit and retail cards.

[Credit Score Tool: Get your free credit score and report card from Credit.com]

Q: Does it help your score to pay finance charges?

A: No. Neither the finance charge rate nor the amount appears on a credit report. Of course, account balances not paid in full each month may include finance charges, but that level of detail doesn’t appear on the credit report.

Q: Will a debit card or prepaid card help my credit score?

A: No. While they may look and often function like a credit card, using a debit or prepaid card is essentially spending your own money. With credit cards, you are being extended credit, even if only temporarily. For this reason, debit and prepaid cards don’t appear on credit reports, and are not included in credit scores.

To be clear, paying all credit card charges before finance charges are incurred is the goal here, with many consumers using some of the following techniques for using credit to their advantage, while remaining debt-free:

  • Paying for your charges the same day you make the purchase using online banking. Or, if it’s a department or other retail card you’re using, you may be able to make the payment right then and there in the store. With this method, the balance for the account will appear on your next statement as zero, while maintaining a positive payment history and zero percent credit utilization.
  • Prior to the next statement date, making multiple smaller payments for convenience. As long as all charges are paid by the next due date, balances will be reported as zero, payments as current, and utilization as zero percent.
  • Waiting for the charges to appear on your next statement, and paying the entire balance before the due date on that statement — either in one or multiple payments. While not quite as good for your score as the above methods, due to your credit report now showing a balance for the account, as long as you pay by the due date on your statement you will still avoid finance charges and remain essentially debt-free.

A reader even wrote to us with her own strategy for maintaining a great credit score while staying debt-free:

I routinely use credit cards for just about everything and pay the balance off every month. This past year, I bought a computer and some other things with the points I had accumulated. My credit score is 809 which gives me peace of mind. — Donna

[Free Resource: Check your credit score and report card for free with Credit.com]

Image: iStockphoto

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.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

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.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

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