One of the myths of having a good credit score is that you must carry a balance on your debt every month. This simply is not true. In fact, if you read on you’ll learn more about how we continue to maintain an 800 credit score despite being completely debt free for two years.
Our family followed the Dave Ramsey approach to becoming debt free. Overall, I like his baby steps to achieving financial freedom. However, I don’t love all of his tactics. One tactic that I not only don’t like but think is dangerous is that you don’t need a credit score. If you eventually stop using debt completely after becoming debt free you will lose your credit score.
This seems silly to me in this day and age. Not having a credit score can prevent someone from getting a mortgage or possibly even getting a job. More companies these days are running credit checks on new employees. And while not having a credit score hopefully won’t keep someone from getting a job, it’s possible that it could factor into the decision and raise suspicion. Additionally, cell phone carriers or utility companies may run a credit check to determine if a deposit is needed.
These examples don’t even include the obvious of applying for a car loan or credit card. (Hopefully, you won’t need to apply for a car loan if already debt free, but you never know.) Regardless, whether you are completely debt free or just starting out on your financial journey, having a good credit score will provide benefits in several areas of life.
How We Built an 800 Credit Score
About 15 years ago I completed my undergraduate degree and was ready to take on the world. Now living on my own trying to cut the financial cord from my parents, I realized that I needed to start building credit. As you may know, it can be difficult to start building credit when you have none.
My first credit card was a company card from Circuit City. My parents co-signed and I ended up buying a $1,200 television on credit. It was a 32” HD television that today could be bought for about $150 brand new. Obviously, financing a television isn’t the best idea but at the time I didn’t know better. I was able to pay it off within 18 months before the zero percent interest promotion expired. I definitely don’t recommend financing a television to start building your credit but in my case, it was a start.
My next step was to open a credit card at my bank. Once I had established some credit, my bank was willing to give me a card with a $500 limit. I used this card exclusively for buying gas for my car for about two or three years.
We eventually moved on to finance a car, get a mortgage, and expand the use of my credit cards. My wife ended up with about $50,000 in student loan debt so by 2011 we were in six-figure debt with little savings. We were paying all kinds of bills to pay back our debt. Creditors loved us because we had a lot of debt and were good at paying it back. It may be obvious but going into debt for the sole purpose of building a credit score is foolish.
How We Maintain an 800 Credit Score
Improving your credit score is relatively simple. Don’t miss any payments, keep your balances low relative to overall credit, and show a history of paying your debts.
Despite making a few foolish financial decisions along the way, we never missed a payment on any of our debts. This is the most critical aspect of maintaining a high credit score.
Once we made the last payment on our mortgage in 2018, we became completely debt free. One of the myths about having a high credit score is that you need to have a revolving debt to keep your score up. That is not true. However, you do have to show some continued record of being able to pay back debt even when you don’t have any. So how do you do this?
We’ve done this by continuing to use our credit cards and paying them off at the end of every month. This allows us to avoid revolving debt while maintaining our high credit scores.
Not rocket science, I know. All it takes is a little monthly spending on your credit card to maintain a high credit score after becoming debt free. It’s as simple as that. Right now, our credit score is around 840 despite not having revolving debt. So, if someone tells you that you NEED to carry revolving debt to keep your credit score up, you should know that is not true.
I know that technically we are still using debt. However, rarely do we ever let it carry over from month to month. If you are completely debt free and stop using all debt, then eventually your credit score will disappear. As noted earlier, I would not recommend this approach. Anyone able to become debt free should hopefully be able to use credit cards in a responsible way.
My Take on Credit Cards in General
I’ll close by saying this about credit cards: they are a tool that can provide a number of benefits to users. Convenience, cashback and travel reward bonuses, use in emergency situations, and the ability to build a credit score to name a few. On the other hand, credit cards can be a financial disaster for many families. The double-digit interest rates that come with many cards can be crippling. The stats show that a high percentage of credit card holders end up carrying a balance and paying that high-interest rate.
I will never recommend or push credit cards on this blog. While someone who is debt free may be able to use credit cards responsibly, many others cannot. Credit cards can create a vicious spiral for those already deep in consumer debt. Double digit interest rates can keep you swimming upstream against those payments for a long time. I know that some people may need a credit card for emergency situations, but just be careful not to overuse it if you are still on the debt pay down journey.
In the end, you have to know yourself when it comes to credit cards. If the urge to overspend is there, then get rid of them. Double digit interest payments for a credit score are not worth it.
An 800 Credit Score without Debt
Having a good credit score is not overly complicated. Like many things with personal finance, the concepts are simple but the doing can be hard.
To have an 800 credit score the absolute best thing you can do is pay your bills on time, every time. There are other factors at play of course such as credit card utilization (how much approved credit are you using), length of credit history, total accounts, and a number of inquiries. However, if you pay your bills on time then more than likely you’ll have a good credit score.
If you are doing all of these things but your credit score remains low, there’s also the possibility of fraud or a mistake. You can go to annualcreditreport.com to request a free copy of your credit reports. Under federal law, you can get a free credit report from each of the three credit bureaus once every 12 months. Annualcreditreport.com is the only authorized source for a free credit report.
Thanks for reading! If you have questions let me know in the comments.
Financial Pilgrimage is a blog dedicated to helping young families pay down debt and live financially free by sharing our personal stories, the stories of others, and financial tips to improve your family’s finances. Mark is a husband of one and father of two and calls St. Louis, MO, home. He also loves playing in old man baseball leagues, working out, and being anywhere near the water.