You don’t need to keep an installment loan–like a mortgage, car loan, or student loan–to keep a high credit score. You can do it all with credit cards.
Having a high credit score can help you out in a bunch of ways. Cheaper loans! Pre-approval for everything without asking anyone!
But what if you hate paying interest and owing banks money? Is it possible to have a high credit score without large loans?
Absolutely! And you can do it without paying a penny in interest.
My friend was debt free, and it made life harder.
I was talking with a friend–let’s call him Drew–about how he and his wife were trying to help their son rent an apartment. Drew’s son graduated college and was looking to move into an apartment.
But everywhere they visited, Drew’s family kept getting denied because of their credit score.
Over the last few years, Drew and his family have been completely debt free. They even got rid of all their credit cards.
What Drew didn’t realize was FICO stops calculating your credit score after six months of having no accounts. Drew didn’t have a credit score! Neither did his wife or son.
Desperate times called for desperate measures, so Drew opened a new credit card. He could only get a $500 limit, but it was enough to get FICO to start calculating a score again.
The single credit card was enough to qualify Drew to rent an apartment for his son. He doesn’t have the greatest score in the world, but it’s enough.
If you are okay with using credit cards and paying them off each month, it’s possible to have a high credit score and avoid paying any interest.
Using only credit cards hits the top 4 categories for FICO scores.
The exact way that FICO calculates your credit score is a secret, but five factors affect your score. Here’s how having only credit cards affects those categories.
- Payment History – 35% of your FICO credit score is based on if you pay your bills on time. As long as you pay the minimum amount on time, your credit score will go up. Paying off the entire balance is even better.
- Amount Owed – 30% of your score is how much of your “credit bucket” you have used. Also known as a credit utilization ratio, FICO scores you on how much you charge compared to your credit limit. Maxing out your credit cards is bad, so get the highest credit limits you can and charge as little as possible.
- Credit History – 15% of your score depends on how long your credit card accounts have been open. The longer, the better.
- New Credit – 10% of your score is based on opening new accounts. When a bank checks your credit score to approve or deny you for an account, they create a “hard inquiry.” Opening a bunch of accounts at once damages your score.
- Credit Mix – The final 10% of your credit score depends on what types of loans you have. Credit cards and other lines of credit are called revolving credit. Loans with regular, monthly payments (such as student, car, or home loan) are installment loans. Having both types of loans helps your score.
Using only credit cards is fine for all but the credit mix category. To have a perfect score, you should have an installment loan on your record.
But as you’ll see in the next section, you shouldn’t worry about credit mix.
Credit mix is not a big deal.
You can’t get a perfect credit score with only using credit cards because of the credit mix category. But keep in mind that 90% of your score depends on other factors credit cards can cover.
- Paying on time? Check.
- Not maxing out your credit cards? Check.
- Keeping your accounts open? Check.
- Not opening a bunch of new cards at once? Check.
I used to worry that paying off my mortgage would make my credit score plummet, but after all the research I’ve done, I found out it won’t happen.
Paying off your last installment loan may cause your credit score to dip a little due to the change in credit mix, but who cares?
If you are willing to sacrifice a couple of points and not owe Sallie Mae any more money, then you’ll be okay. For me, I can’t wait to pay off my mortgage. I would love to do something else with the money for my monthly payment.
How to hate debt and keep a high credit score.
Using credit cards won’t get you a perfect score, but they can help. They are the way to keep a high credit score while you eagerly pay off all your other loans.
To get out of debt and keep a high credit score:
- Keep using credit cards
- Pay off your credit cards every month
- Pay off all your other loans as fast as possible
Want to get started? Raise your credit score in 30 days! Boost your score by 100 points or more before FICO updates their formulas.
Use my step-by-step guide, #AdultingWithCreditScores to:
- Get approved to rent your dream apartment and throw lavish parties for your friends.
- Earn a mortgage rate that doesn’t drag you into poverty by using my advanced No Pain, No Gain Strategies.
- Catapult your credit score higher than you dreamed possible–even if you’re starting from scratch.