Dear Jim,

We just paid off our home, are completely debt free and recently retired. While we have savings to cover future expenses such as cars, etc., we may want to finance our next car or even consider financing a second home in the future. What do you suggest we have in place to maintain good credit scores for future financing?


Chad, Grand Junction

Dear Chad,

Congratulations on your retirement and great job on becoming debt free! A few years ago I presented a class to a group of recent retirees and they asked the same question. How do I maintain a good credit score if I want to be debt free? While it may feel great to be debt free, it can actually hurt your credit scores.

In my previous articles, you may have read that the credit bureaus like to see a good mix of credit, including one or two installment loan(s) (mortgage, auto, student, etc.) and two to three revolving accounts (credit cards) with a balance. It is also ok to have additional credit cards that you use on occasion with no balances. Most important, do not close any of your revolving accounts since the payment history and the length of that payment history impacts up to 50% of your FICO scores. This is especially true for revolving accounts you have had for many years. If you are debt free, I recommend you use each of your cards at least once a quarter (tank of gas, groceries, etc.) and you can pay them off each billing cycle.

Carrying some debt will help you maintain good credit scores since the current scoring models prefer to see some payment history on several open credit cards with low or no balance showing you are responsible with your money.

This goes against everything we were taught when we were young. The goal was to pay off your house, be debt free and pay cash for everything. I am not a financial advisor, so I always suggest talking to an expert for advice on how you should handle your finances. But from a credit score perspective, having credit is necessary in the world we live in today. If you decide to finance a new car or a second home, your interest rate will be based on your credit score.

Today, scoring models don’t take into account whether you pay off your credit cards every month. They look at the ratio between your balances and your credit limit. A good rule is to keep your credit card balances below 20%. However, if you prefer to charge all of your purchases on a credit card to earn points, it is OK to have a higher balance but make sure your balance is lower prior to applying for new financing. Each credit card reports to the credit bureaus at different times of the month. Some report at the end, some report at the beginning and some even report twice a month. You can contact your credit card company to get the date of when they report to the credit bureaus.

To avoid maxing out your credit card, I suggest you spread out your purchases across several credit cards. This minimizes the risk of a credit card company closing one of your cards because of a lack of activity which can lower your credit score.

While the perfect mix of credit would include having one or two installment loans, don’t worry if the only debt you have are credit cards. To maintain a good credit score, keep at least three credit cards open with long payment history and keep your balances below 20% of the credit limit. Use all of them on a regular basis and make your payments on time. This will help you maintain a good credit score and allow you to finance that future second home or car with a good interest rate.

Jim Kaiser

Branch Manager, NMLS #1721861

Cherry Creek Mortgage, LLC, NMLS 3001