Do You Need a Good Credit Score with No Debt?

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Some people on the internet think having a credit score while being debt-free is a bad thing. The idea is that a credit score shows how well you handle debt, and they believe all debt is bad.

But it’s not that simple. 

There are real, practical reasons to maintain a credit score even if you don’t have any monthly payments. And not all debt is automatically bad. I’m not saying debt is good either, but you have to weigh the pros and cons based on your own situation.

Even if your finances are in good shape, it’s not always realistic to save up enough to pay cash for a new car. Your old car might break down before you’ve saved enough, or you might need a handicap-accessible vehicle sooner than you can afford. And in some housing markets, waiting until you have 20% saved just isn’t an option. 

In situations like these, a high credit score can make you more appealing to financial institutions and help you lock in a lower interest rate, while those with lower FICO scores end up paying more.

I’m all for paying off debt, don’t get me wrong. But I also think it’s important to be realistic about your finances and not make life harder than it has to be.

Before you read any further, let’s get this out of the way: The information here is truthful and accurate to the best of my knowledge, but it’s for educational purposes only and shouldn’t be taken as advice for specific situations. If you need advice for your finances, it’s best to talk to a financial advisor.

What is a credit score?

Whether you’re interested in a credit product right now or not, understanding your credit score is an important part of managing your finances. It may not be personal finance 101, but it still matters, at least to most people.

A credit score is a number that lenders use to gauge how likely you are to repay a loan. It’s not a perfect system, but your history with debt gives financial institutions such as banks, credit card companies, and credit unions an idea of how you might handle borrowing in the future.

Credit scores range from 300 to 850, but you can also have no credit score, which isn’t necessarily a bad thing. A higher score makes it easier to get approved for loans and credit cards with better interest rates. But if your score is too low, you might have a hard time getting a car loan, personal loan, or any financing at all.

The closer your score is to 300, the worse it is. The closer it is to the highest possible score, the better. A higher score means lower interest rates, while a lower score leads to higher rates. 

Be sure to check your credit at least once a quarter to track your score. Staying aware of your financial situation and seeing the numbers in front of you can help you stay on top of your financial obligations—and might even motivate you to make positive changes.

What impacts your credit score?

Your credit score is based on your past and current debt, as well as your payment behavior. While the exact formula isn’t publicly available, several key factors influence your score. Your overall credit rating is impacted by:

• Payment history: On-time payments help your score, while late payments, defaults, or missed bills can really hurt it.
• How much credit card debt and other debts you currently have: The amount you owe across all loans and credit cards affects your score.
• Credit utilization: Using a high percentage of your credit limit can lower your score, while keeping your balances low can help improve it.
• Length of your credit history: Older accounts can boost your score since they show a longer track record of borrowing.
• Negative marks: Collections, foreclosures, and bankruptcies can have a negative impact on your score.
• Types of credit accounts: A mix of credit cards, auto loans, and mortgages may help, while having only one type of credit account might not be as beneficial.
• Hard inquiries: Too much credit activity, especially applying for new credit too often, can temporarily lower your FICO score.

If you want to stay in good standing with lenders and access their financial products, have a solid credit history, keep your debt low, and make payments on time.

Who reports your credit score?

There are three major credit bureaus: Equifax, TransUnion, and Experian. Each will calculate a score for you and record the debts associated with your social security number as part of your credit report. 

You can request a free credit report from each agency every 12 months. If you space them out, requesting one every 4 months, you’ll be able to consistently monitor your credit report. You should know that your credit report doesn’t provide a credit score. Instead, it’s just a list of the current debts known to be associated with you.

Request your free credit reports now (TIP: use your credit report to also calculate & track your net worth). You should never pay for a credit report since you can get a free report from each bureau every year. Beware of anyone who requests payment in exchange for your credit report. 

What happens to your credit score while debt-free?

When you first start paying off debt, your credit score will likely go up. Using a smaller percentage of the available credit will improve your score initially. Paying off debt shows you are acting responsibly in the eyes of the credit bureaus. 

When you have paid off all of your debt, there will no longer be debt-related information reported for your social security number. That means that, as time passes, your credit score will drop to zero, since there will be no activity at all. 

If you follow Dave Ramsey, you know he is a huge proponent of a zero credit score, because that means you have no debt. Don’t get me wrong, no debt is great… but a zero credit score may not be. 

Do you need a credit score while debt-free?

Yes, you probably need a credit score when you’re debt-free. 

There are many life events that require a credit score, beyond getting more debt. Unless you’re independently wealthy, with millions in assets and cash, you are likely going to need a credit score again. 

The super-wealthy can easily pay for their own life insurance or handle higher car insurance premiums. For the average person, living without a credit score might be possible, but it’s usually inconvenient, challenging, or simply not practical.

Renting a home

Landlords, especially corporations, often use applicants’ credit scores to determine who to rent to. Choosing a new tenant is risky for landlords, so they want to select the person who is most likely to continue to pay rent.

You can still rent an apartment without a credit score or with a bad one, but in a competitive rental market, your chances of getting the place you want are lower. It’ll also be harder to find a rental that fits your needs and a landlord who’s willing to work with you. 

Establishing new utility services

Requesting new utility services is pretty much applying for credit, although not a loan. The water, gas, or electric company bills you at the end of the month for the services you used, rather than requiring a pre-payment. This isn’t a loan because no interest is charged and you’re expected to pay the full balance each month. 

In some areas, utility companies may run a credit check when you set up a new account. They can choose to use either the standard FICO credit score or a specialized score designed specifically for utility services.

If you have no credit score or a low credit score, you may be required to pay a deposit to set up the account. In some areas, this fee is charged annually, which means your utility costs could increase because of your credit history.

Also, you might need someone to co-sign on the account, agreeing to pay the bill if you fail to do so. But finding someone willing to take on that risk can be challenging, depending on your financial history and job stability. Money issues can really strain personal relationships.

Some jobs

Certain high-level jobs in security or finance often require a credit check as part of the hiring process. A good credit history can be seen as an indicator of your reliability and trustworthiness. 

In some professions, specific types of debt might even be viewed as potential vulnerabilities, making you more susceptible to blackmail or bribes.

While this won’t affect most people, it’s something to keep in mind if your career is in a related field.

Mortgage

The largest loan most people take on is a home loan. A higher credit score leads to a lower interest rate, which can save tens of thousands of dollars over the life of the loan. 

Having no credit score makes it hard to get a mortgage, but Dave Ramsey loves to talk about the possibility of getting a mortgage using manual underwriting. I’m not even going to pretend to understand the process of manual underwriting, but it involves “lots and lots of documentation.” 

Having obtained a mortgage and refinanced it, I know that a traditional mortgage requires a ton of documentation. Adding more stress to the process doesn’t seem like the best option, but to each their own.

My take? If you can get a mortgage without a credit score, great. Go for it.

But for most people, that’s not the easiest path to homeownership. The majority of people have some kind of credit score, and they’ll need it even if they’re debt-free.

It can take 10 years or more for negative marks to disappear from your credit report. Unpaid taxes or student loans can even stay on your report indefinitely, meaning your credit score might never fully recover.

Even after you’ve paid off a credit account, it can take up to 7 years for it to stop showing up on your credit report. This means you’ll still have a credit score, and it will affect the interest rate you’re offered on a mortgage.

Property insurance

In some states, it’s legal for auto or homeowner’s/renter’s insurance companies to consider your credit score when issuing policies or determining pricing. While they typically use a specialized insurance credit score, this score may still include aspects of your financial history. Individual insurance providers decide the specific formula used to calculate this score.

California, Hawaii, Massachusetts, and Michigan do not allow insurers to set rates based on credit scores. In other states, the credit score cannot be the sole reason for denying coverage or increasing rates. The insurance credit score is designed to estimate how likely you are to file an insurance claim, rather than predicting whether you’ll repay a loan.

Life insurance

Technically, your credit score doesn’t directly affect your life insurance premiums or your chances of approval. However, your credit history might, which is why I wanted to mention it.

Each insurance company handles major credit factors differently, but here are some things they might consider:

• Bankruptcy  
• High credit card balances  
• A high percentage of credit card usage  
• Late payments  

Property insurance includes auto, renter’s, and homeowner’s insurance. If you’re looking for ways to save on these types of insurance, check out the free Frugal Year Challenge section for January, which focuses on property insurance. The course was free in 2024, but the price will increase in 2025.

The practical way to approach credit while debt free

After becoming debt-free, you should make an effort to maintain a good credit score until you reach financial independence. At some point, you’ll likely switch insurance providers, and you might need to move, rent a new place, or set up new utilities. 

You never know what the future holds, and I’m a firm believer in being prepared. Part of that preparation means having a decent credit score.

How to carefully keep a credit score while debt free

Maintaining a good credit score can be straightforward, especially after you’ve paid off your loans and developed solid financial habits. Here’s how to do it:

1. Live within your means: Create and stick to a budget that ensures you spend less than you earn. This habit is super important, and ideally, you’ll pick it up while paying off your debt—it’ll make the whole process a lot easier.

2. Keep at least one credit card open: Your oldest account is better for your credit score, but financially, it makes sense to choose the card with the best rewards. Decide based on your priorities.  

3. Use the card for a recurring bill: Set up your credit card to auto-pay a monthly expense, like Netflix or your internet bill.  

4. Set up auto-pay for the card: Automate payments from your bank account to the credit card to avoid carrying a balance or missing payments.  

Doing this should help you keep an excellent credit score, even if you don’t have any other debt. It’s simple, cheap, and doesn’t take much effort, so there’s really no reason not to do it.

The catch? 

You’ve got to be careful with your spending. If you can’t resist the urge to overspend on the card, you’ll end up right back in debt. And after all the work you’ve done to get out, you don’t want to fall back into that trap. If you’re not 100% sure you can stick to your budget, only use the card for that one small bill and nothing else.

Sources:

The Penny Hoarder: Dave Ramsey Says You Don’t Need a Credit Score. 5 Reasons That’s Nonsense.

Consumer Finance: What is a credit score?

Federal Trade Commission, Consumer Information: Getting Utility Services: Why Your Credit Matters

Nerd Wallet: What to Know About a Credit-Based Insurance Score

Ramsey Solutions: How to Get a Mortgage With No Credit Score

Bankrate: When does debt fall off your credit report?

Policy Genius: Does your credit score affect your life insurance premiums?