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For several years we have had a mortgage, two car loans, and an active line of credit from our bank.

We made payments on all of these religiously and our credit score is now in the high 700s.

Recently, we sold our house and used the equity to pay off our cars. We don't have any open credit cards.

We plan to save and buy a house in about a year but didn't consider what this move would possibly do to our FICO score.

What's the best way to maintain our already good scores without mortgage or auto loans?

Rodrigo de Azevedo
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Kalamane
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    Are you currently renting? If so does your landlord report that to the credit bureaus? – Freiheit Mar 15 '18 at 20:37
  • @Freiheit That's a great question, I'll have to find out. – Kalamane Mar 15 '18 at 22:20
  • Not having any debt or loans is a good thing for your credit score. Your credit score isn't going to go down for no reason.. – user428517 Mar 16 '18 at 19:29
  • I have no debt other than a mortgage, and haven't had in decades, since I paid off my student loan. (Other than a few 0% interest credit cards, which I think of as free money rather than debt :-)) I use credit cards for purchases, and pay them off every month. Last I checked, my credit score was well over 800. – jamesqf Mar 16 '18 at 20:03

3 Answers3

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All I can tell you is what I have experienced.

Since paying off all of my debt, my credit score is the highest of my life, hovering just above 800. I have one open credit card.

If I were in your shoes, I would keep one open credit card. I would use it for things where I don't really make a purchase decision, like paying for gasoline at the pump, or the water bill. Plenty of studies have shown that people spend more at restaurants and clothing stores when they use a charge card.

Then pay off the balance each month. Your credit score should remain very high and it will not cost you anything.

Of course also pay your utilities and rent on time each month.

This advice may be contrary to other guides on how to inflate your credit score, but as I had said it is my current experience. FICO will change the algorithm to better model a person's credit worthiness. Because of this, I feel that this advice is timeless: pay all of your bills on time, and have very little, or better zero, in loans.

JTP - Apologise to Monica
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Pete B.
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    I can second that. I'm no longer on any car loan or mortgage accounts, only have credit cards, and an 800+ score. – CactusCake Mar 15 '18 at 20:28
  • This is really good advice. Out of college I had one credit card. I lived off it (note I did not say lived off "debt"). I had a $1000 credit limit to begin with and I was spending 3x that amount when I first moved to a new city, started a new job, etc. for several months (obviously paying it down a lot in between statement dates). Even after the spending calmed down, using it for everything made my credit score skyrocket. – HK47 Mar 15 '18 at 21:57
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    Ditto; my experience, too. The only change I'd make is that you should have two open cards, so that you have another one to use in case your primary card is stolen/hacked/etc and you're waiting for it to be replaced. – RonJohn Mar 16 '18 at 13:52
  • @RonJohn you say that and guess what just happened? I found out my card was used to buy a Louis Vuitton purse online. :^( CC Fraud again! – Pete B. Mar 16 '18 at 14:40
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    We don't judge your lifestyle... :o – RonJohn Mar 16 '18 at 14:42
  • "Plenty of studies have shown that people spend more at restaurants and clothing stores when they use a charge card." - If you have an actual study you can link to, I would be delighted to add it to the FAQ-linked Do people tend to spend less when using cash than credit cards? to my answer containing such links. – JTP - Apologise to Monica Apr 06 '18 at 13:50
  • this isn't contrary to advice, the other guides are about how to do it quickly, inflate it quickly to be deemed more credit worthy! yours is a passive way, the inflaters all know that works but someone in their young 20s is aiming for an exemption from socioeconomic woes NOW to enjoy experiences NOW, not in their 30s, 40s or 50s. And if something goes wrong, they can repair/inflate it much faster too. – CQM Apr 06 '18 at 15:54
  • @CQM bankruptcy is an enjoyable experience? Weird. – Pete B. Apr 06 '18 at 16:41
  • @PeteB. the one dimensional non sequitur ignores many more favorable realities, an inflated credit score means better car loan terms which means access to broader job locations, it means owning a car with more efficient gas mileage and lower monthly payments and cheaper/less frequent repairs which means more of your paycheck goes to savings or more quickly paying off the car. The same reality can be extrapolated to a mortgage, and even being approved for renting in better parts of town, all of which are closer to more opportunities. The earned points mean cheaper/free vacations. – CQM Apr 06 '18 at 17:24
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    @CQM: Not true. The cars with the best gas mileage (e.g. 1st gen Honda Insight, early Prius, even some Nissan Leaf ECs) can be bought used, fairly cheaply, so it's not necessary to have an auto loan. – jamesqf Apr 06 '18 at 20:09
  • @jamesqf thats nice and it wasn't always true and also still doesn't accurately describe everyone's situation, so the whole thing is false? Regardless, this is about optimizations possible with inflated credit scores, they are optional, do the semantics REALLY change that? – CQM Apr 06 '18 at 20:14
  • @CQM: Well, if you want to argue the definition between true and not true, we should move to either the English or Philosophy sites :-) It's simply a fact that (outside of buying a Tesla or other high-priced EV), you won't find better gas mileage by buying new, or even high-priced used. And not having an auto loan is likely to save you far more than the cost of a little extra gas. – jamesqf Apr 07 '18 at 19:07
  • @jamesqf it was intended to be a relatable reality for the vast middle america, of which I don't live there and dont require a car for my lifestyle so you're right, the mortgage and renting realities that I also pointed out are more broadly applicable this decade. – CQM Apr 08 '18 at 03:04
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There are 5 components to your credit score.

  1. Age of accounts. Just as it sounds, this is how old your accounts are. Paid off accounts can fall off your score and, in the case of a mortgage, likely make the average lower.

  2. Utilization. This is simply how much unsecured debt you have divided by your total credit limit.

  3. Payment history. How timely are your payments

  4. Credit mix, which scores you by having different types of accounts

  5. How much credit you've recently applied for. This is how many hard pulls are on your credit report. Hard pulls occur when you apply for credit. They impact your score heavily when they're less than 6 months old. They have no impact after a year, and they disappear entirely have 2 years.

Having no credit cards is bad for your credit score because it means your mix is negatively affected and so is your utilization (no cards means no credit limit).

You should consider getting a couple no fee credit cards so that in a year the effect of the hard pull will be gone but the utilization and mix category will be improved. The age of accounts will probably be worse but eventually it'll catch up. This recommendation is contingent on you always paying the balance off every month so that you incur no interest expenses and keep your utilization low.

Dean MacGregor
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The generally accepted formula for maximizing your FICO score is 3 revolving accounts with only one reporting a small balance (~5% of the limit), one open installment account and one open mortgage account. Maintain that combination, with no late payments or other negatives and your score will quickly rise to 800+

Edit: changed "carrying" to "reporting" for clarity.

Norm
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  • Sounds about right from my experience. Score in high 700s when I carry no balance but goes above 800 when I carry a balance for a few months. – Dunk Mar 15 '18 at 23:34
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    I didn't think whether a balance is "carried" is part of the information reported, only what the balance on the particular day the statement is cut each month. You could pay it off the next day and as long as you charge something before the next statement is issued, it'll show as a non-zero balance although no interest is ever paid. – Ben Voigt Mar 16 '18 at 01:11
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    Ben - yes, you just have to "show" a small balance at the end of each reporting period. The balance can be paid after the statement closes and then another small charge made. – Norm Mar 16 '18 at 12:54
  • I don't actually pay close attention to my credit score and I normally pay off my balances each month. However, there are sometimes occasions where being more liquid is preferable to paying off the balance, as I did recently. This was the second time I noticed what I described occurred. – Dunk Mar 16 '18 at 20:08
  • The system can't tell if you're carrying a balance or not, only what you owe when the snapshot is made. Some years back applying for a card I got a call from one of their credit people. Among other things he specifically asked about a balance on another card--only I have never carried a balance on that card other than the time they goofed an automatic payment. What he actually saw was current charges only. – Loren Pechtel Apr 06 '18 at 02:49
  • @Loren - True - the system only knows what the issuer reports. This is why its good to know your card issuers reporting habits. Some issuers are known to report at the end of each month, some report the day of statement closing, some will report a zero balance any time it occurs, etc. – Norm Apr 06 '18 at 12:48
  • The important aspect of what I was saying is that the credit report does not distinguish current debt from carried debt. It only shows what's owed. And the card in question normally never has a zero balance--there are new charges before the due date of the payment. (And with the automatic payment it's always paid on the due date.) – Loren Pechtel Apr 07 '18 at 01:01
  • Loren - yes, that's why it important to pay down your balance BEFORE the report date or statement closing date (whichever is appropriate). You can run a card to its limit each month and pay it off after getting the statement - you're not "carrying" a balance, but to the system it will look like a maxed out card and you will take a huge score hit. – Norm Apr 09 '18 at 12:53
  • IIRC, more accounts is better, up to a point - like in the range of 5-10? Also, having more accounts opened effectively gives you "ballast" against utilization and average age of accounts (so opening a new account doesn't effect you as much). To someone rebuilding credit from scratch, I'd recommend opening as many as 5 cards over a fairly short period of time, and just accepting that their credit is going to take a few years to mature. – John K Sep 13 '18 at 20:50