Have you recently paid off your debt and noticed your credit score drop?
This recently happened to Christin from Detroit after becoming debt-free over the past 10 years following the Dave Ramsey plan. Her score went from 850 to 620 and she's disappointed. She loves the idea of being debt-free but wants the option to get loans in the future as she's interested in investing in rental properties.
She reached out to share her story and ask for advice on how you can increase your credit score after becoming debt-free.
As someone who has plunged headfirst into the world of debt-free, I know exactly how Christin is feeling.
It’s awesome to become completely debt-free, but what if you want to get a loan in the future for something like a rental property. Having a credit score is necessary.
My wife and I went credit card free for 5 years! We eventually realized that our spending didn’t change much at all between debit cards and credit cards.
So we went back to credit cards. We started earning points, miles and rewards again and alas, we didn’t fall into a pit of spending despair. We’re alive and well. And we got some free vacations out of it.
Lately, we’ve found a balance of just having one credit card each, and we’re happy. We get our points. Our credit scores are in the 700’s and if we want to get into investing in rental properties like Christin, we have that option.
It sounds like Christin enjoys being debt-free and all the great benefits that come with it. So how can you remain completely debt-free and maintain an excellent credit score?
Here’s what I would suggest.
1. Sign Up for a Credit Card
With some discipline and responsibility, I believe you can remain debt free with a credit card and get some perks along the way.
With a credit score in the 600’s, you may need to shop around for cards that fit that range. Even if you are financially well off, you may get rejected from some cards that require “Excellent” credit. It sounds dumb because it is!
But we have to remember this is essentially a borrowing score. It's basically gauging how good we are at borrowing.
So if we want to borrow more, then we need to play their little game.
I’m a big fan of the Capital One Quicksilver Credit Card. From my research, it looks like you may be eligible if your credit score is in the 600 range.
I like it because Capital One’s interface is very user-friendly, you get 1% cashback on all purchases and it has no annual fee.
I’ve had the Quicksilver card for a few years now. I dig it.
2. Put a Small Recurring Charge on that Card
Are you a Netflix or Spotify subscriber? Or anything that’s like $10 – $30 per month?
Take that monthly recurring charge and pay for it with your new credit card.
I got this tip from Whitney Hansen. So simple. So genius.
3. Set Up Auto Payment
By setting up an auto payment, you are ensuring you’ll never forget to pay this card each month.
And when you make consistent, regular and on-time payments, you’ll develop a good payment history on your credit reports once again.
Your payment history makes up 35% of your credit score so it’s THE most important element of your credit score.
4. Keep your Credit Utilization Low
Another big factor in your credit score is your credit utilization. That’s how much of your available credit that you’re actually using. This makes up 30% of your score.
So for example, if you have a $10,000 limit on your new credit card and you’re using $9,000 each month, that’s a high utilization and you’ll get dinged for that.
Try to keep your utilization below 30%. So again, if you have a $10,000 limit, then keep your spending to less than $3,000.
If this is an issue, ask for a limit increase after you’ve had the card for a while.
Between making timely and consistent payments and keeping your utilization low, that’s 65% of your score!
5. Understand the Other Factors of Your Credit Score
There are 3 other factors that make up your credit score and they are as follows:
- Credit Age (15%): This takes into account how long you’ve been borrowing and the average age of your loans
- New credit (10%): They want to make sure you’re not taking out a bunch of new credit in a short period of time. If you are, this can affect your score.
- Credit mix (10%): This factors in the different type of credit you have
So, it’s not just one factor that makes up your credit score, it’s 5 factors!
6. Track Your Credit Score and Report
Sign up for a free service like Credit Sesame to track your score progress. They will help you with credit monitoring too which is helpful in this digital day and age.
Recently, the FTC cracked down on a debt collector that planted about $100 million worth of fake debt in people's credit files! So we need to be hyper-vigilant to make sure what is actually on our report is real.
You can get a free report each year through annualcreditreport.com as well. So stay on it and make sure your information is safe and accurate!
7. Wait for your Credit Score to Increase
Your credit score increase could take around 3 months if you don’t have any late payments, defaults, or bankruptcies on your record.
Over time, your credit age (which makes up 15% of your score) will improve and you’ll build that score back up to the 700’s or 800’s.
Final Thoughts on How to Increase Your Credit Score (After Becoming Debt-Free)
If you want to keep rocking that Dave Ramsey party and stay completely debt free for life, you can skip all these steps. If you did want to buy a new home or a rental property in the future like Christin, you can just save up a boatload of money and buy a home in cash.
Personally, I’d like to have the option. It is a bit of work to get that credit score back up, but it could be worth it for you.
There are many benefits to complete debt freedom and there's also a beauty in leaving yourself options with a high credit score. In the end, it’s up to you!
What do you think? Do you think it's important to have an excellent credit score after becoming debt-free?
Or is it better for forget your credit score altogether?
Please let us know in the comments below.
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Hey Andy, thank you SO much for answering my question on your show. Your answers were SUPER helpful. I had no idea it takes about 3 months for credit to start improving- that’s actually better than I thought! I’m going to put Netflix on auto-pay like you suggested. It’s unfortunate, but I guess we need to play that credit game so we have options! I’m definitely feeling a bit better about all of this after listening to your episode. =) Thanks again.
What a game! unfortunately, we have to play it.
I’d say “Netflix and Chill” but I’m pretty sure that’s something else – haha!
How about “Netflix and Bill”?