Does Debt Help or Hurt Your Credit Score?

The first week of college is here… You’re getting books, checking out the campus, and… signing up for a credit card for a free T-shirt? 

YUP!  That is what I did. I mean, who doesn’t want a free T-shirt and free money? Of course the people manning the table don’t really go into detail about what you’re doing and you sure didn’t learn about this in High School…

This can be a tough beginning if you don’t manage it right.

14 years later (10 of them being involved in finance) I learned the secret that a lot of people don’t get: If your goal is to build credit and keep your score high, you need to have some debt.

The first thing people do is get out of debt (which is great for your pocket book but not always great for your score) and expect an 850 beacon score. Your credit score has a number of contributing factors… One of the main factors is how you pay back your debt.  Paying off your debt means you can’t pay on it anymore. When you don’t have debt to pay on, you have no way to show your accomplishment.

Some say the best thing you can do is to keep a small balance on your credit cards.  This means that if you go out and spend $100 this month and the bill comes, you pay your minimum.  The next month you go out and spend $100 again.  When your bill comes, you pay your previous balance of the $100 that you acquired the month before.  This way you always have a balance (not a large one) and you are constantly paying back on your debt (which raises your score.)

Also, do not be afraid to open smaller non-collateral loans such as signature loans to buy furniture or pay for a trip even if you can pay cash for it.  Keep the loan open for 6 months to a year and pay your small amount of interest (thanks to your good credit score) to keep your score going higher and higher. 

In summary, debt is not always bad.  Too much debt is bad, obviously, but do not be afraid to acquire some.  It will help you in the long run, and will allow people to beg for YOUR business rather than you begging for THEIR help.

This blog was written by Travis McLarty, FTWCCU Financial Services Representative.