Is Being Debt-Free Good for a Credit Score?

You need a track record of responsible debt management to establish a good credit score. That's why living without debts may not be helping you build a good credit rating. You may not even have a credit score if you've never accumulated debts that credit bureaus regularly track.

Credit History

Debt-free people may see themselves as financially responsible, but creditors and lenders judge financial responsibility by looking at people's credit histories. The information in your credit report affects your credit score. However, there isn't anything in your report to score if you don't have a credit card, car loan, mortgage, student loan or similar debt to show how you handle your finances. Credit-scoring models generally don't track utility payments and some other forms of debt, unless they appear on credit reports as collection accounts.

Lenders

Lenders tend to view people who don't have credit histories as risky borrowers. Some banks even consider lending to people who lack credit histories as risky as lending to consumers who have bad credit, according to SmartMoney writer Kelli Grant. As a result, people who are debt-free usually have to pay high interest rates if they decide to apply for a mortgage or credit card. You can avoid high interest charges by building a good credit score while remaining mostly debt-free if you get a credit card and pay off the balance each time you charge something.

Inactive Accounts

Some consumers open a credit card account that they only use for emergencies to remain debt-free. However, they may not be boosting their scores if they're maintaining thin credit histories that leave little account activity for credit bureaus to score. Creditors also may classify such accounts as inactive, since the cardholders rarely use their cards. Creditors have the right to cancel inactive accounts, and they aren't required to give their customers advance notice of the cancellation.

Considerations

Debt-free people may have trouble finding a place to live if they haven't established significant credit histories suitable for scoring. People who lack sufficient credit histories often need co-signers to get loans to buy homes. In such cases, a co-signer who has a good credit rating would have to be willing to guarantee repayment of another person's mortgage. You also may need a co-signer just to rent an apartment if you lack a significant credit history, unless you can pay several months of rent upfront.