Think Perfect Credit Hinges on Having Zero Debt? You’d Be Wrong

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The less debt you have, the better. But it’s possible to have great credit even with debt in your name. Here’s why. 

The higher your credit score, the more likely you are to have flexibility when it comes to borrowing. There are some credit card offers, for example, that are reserved for applicants with credit scores above a certain level. And if you’re applying for an auto loan or mortgage, you’re more likely to get approved and qualify for a competitive interest rate if your credit score is outstanding.

Meanwhile, the two biggest factors that go into calculating a credit score are payment history and credit utilization. Payment history speaks to how timely you are with bills, while utilization speaks to the amount of revolving credit you’re using at once relative to your total credit limit.

You might assume that to attain great credit, you can’t owe any money on your credit cards. But actually, you’d be wrong.

It’s all about percentages

FICO analyzed consumers with perfect credit — meaning, a score of 850 — to see what factors they had in common. Unsurprisingly, they found that consumers in that category have basically no reported history of missed or late payments.

But what was surprising is that a lot of borrowers with a score of 850 had outstanding credit card debt. Not only that, but the average amount of debt (excluding sums owed on mortgages) was around $13,000.

So how did those borrowers manage to get perfect credit? They kept their revolving debt — meaning, their credit card balances — low relative to the total amount of spending power their cards gave them.

In fact, FICO says that among consumers with perfect credit, the average credit utilization level was 4.1%. This means that those with perfect credit use very little of their total credit limit.

Keep your credit card usage to a moderate level

You might assume that to attain perfect credit, or even really good credit, you can’t run up a balance on your credit cards at all. But that’s not true. If you keep your balance low relative to your credit limit, you may find that it doesn’t hurt your score at all — especially if you then pay your credit cards off in full every month.

A good credit utilization ratio is generally considered to be 30% or less. This means owing $3,000 or less on a $10,000 credit limit.

If you’re someone who likes to use credit but wants as high a score as possible, one solution is to secure higher spending limits across your credit cards. You can often make this happen by reporting increases in income to your credit card issuers and requesting credit limit increases.

A $3,000 balance on a $20,000 credit limit, for example, puts you at 15% utilization. That’s a more favorable percentage than a $3,000 balance on a $10,000 limit, which puts you at 30% utilization.

All told, you don’t have to steer clear of using credit to have a great credit score. And to be clear, borrowing in the form of installment loans like mortgages and paying those debts on time could help your credit score improve. But the one type of debt that might hurt your credit score by having it is credit card debt. If you keep your balances low relative to your personal limit, though, it may not damage your credit at all.

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