How to grow your credit score without adding debt…is that even possible?

Last month I finished up a series on finances, and at the end of the series we did a Q&A of all the questions that had come in during the series. You can find the whole series here: STRAPPED

I received another question the following week, and I figured this would be a great place to answer it, here’s the question…

When talking about “good debt”, nowadays you have to have credit to get almost anything. How do you go about getting credit without going into debt?

You are absolutely correct in your belief that the vast majority of the world does work off of, live in, and deal with credit for just about anything! However, it’s a myth to say that to buy almost anything you need credit. In fact, for most things you actually don’t need credit. Even the most recent vehicle we purchased we paid cash for, and that was about $5,500, so it is truly possible to buy many things, maybe even most things without needing credit. (and yes that vehicle 3 years later is in fact still running!)

But, let’s just take that statement at face value, “you need credit to get almost anything. How do you get credit without going into debt?” Well, credit is debt. The whole point of credit is to spend more than you currently have available in cash, which means going into debt. However, there are some things like renting a house, where they do require a credit check, so how do you get a decent credit score without having this massive amount of debt. First we need to look at how credit scores are calculated. Accords to Forbes this is the formula:

35%: Do you pay your bills on time?
30%: How much debt do you have? And what is your utilization?
15%: How long have you had credit?
10%: How many different types of credit do you have?
10%: Have you applied for a lot of new credit recently?

Now, notice the #1 item, pay your bills on time. Did you know that the vast majority of people’s credit scores suffer because they simply do not pay their bills on time? It’s true, so if you want to boost your credit score, pay your bills on time!

…the vast majority of people’s credit scores suffer because they simply do not pay their bills on time

Second piece is specific to debt, but it’s not what you think. It is both a positive and negative on your credit score. For example, if you have $15,000 of available credit (ie credit cards, lines of credit, etc…) yet you only have $1,200 of actual debt, this is seen as very positive! If you however, you’ve maxed that to $14,995 of debt, that’s very bad! The equation goes something like this: How much available credit do you have, minus how much of that credit is tied up in debt, averaged by your income. So, even in their own equation, having more debt is not a positive, it’s actually a negative…it’s always negative! BUT, having available credit that isn’t being used, with no balances being carried over at the end of the month that’s super good! So, how do you build your credit without going into debt?

Here’s a few rules to follow:

Always pay your bills on time, or maybe even a little early to create room for error
Do not carry balances on any cards that you currently have, the longer those balances stay, not only are you paying interest, but it is working against your credit that you want to build.
If you really want to make it pop…have a single credit card that has no balance on it, and pay your bills utilizing that card, and pay that card off every month, on time! That is the trifecta of building credit without going into debt

Here’s the problem though…a lot of people are simply not disciplined enough to do this. The credit card becomes a crutch for wants and isn’t just used to pay bills, and the balance isn’t paid off each month. Then your balances explode, your debt skyrockets…and guess what happens to your precious credit score…yep, it plummets like Wile E Coyote to the barren desert floor below! Don’t be Wile E Coyote!