What's the best way to maintain your credit score after paying off all of your debt?

Question

For several years we have had a mortgage, two car loans, and an active line of credit from our bank.

We made payments on all of these religiously and our credit score is now in the high 700s.

Recently, we sold our house and used the equity to pay off our cars. We don't have any open credit cards.

We plan to save and buy a house in about a year but didn't consider what this move would possibly do to our FICO score.

What's the best way to maintain our already good scores without mortgage or auto loans?

Answer 1

All I can tell you is what I have experienced.

Since paying off all of my debt, my credit score is the highest of my life, hovering just above 800. I have one open credit card.

If I were in your shoes, I would keep one open credit card. I would use it for things where I don't really make a purchase decision, like paying for gasoline at the pump, or the water bill. Plenty of studies have shown that people spend more at restaurants and clothing stores when they use a charge card.

Then pay off the balance each month. Your credit score should remain very high and it will not cost you anything.

Of course also pay your utilities and rent on time each month.

This advice may be contrary to other guides on how to inflate your credit score, but as I had said it is my current experience. FICO will change the algorithm to better model a person's credit worthiness. Because of this, I feel that this advice is timeless: pay all of your bills on time, and have very little, or better zero, in loans.

Answer 2

There are 5 components to your credit score.

1. Age of accounts. Just as it sounds, this is how old your accounts are. Paid off accounts can fall off your score and, in the case of a mortgage, likely make the average lower.

2. Utilization. This is simply how much unsecured debt you have divided by your total credit limit.

3. Payment history. How timely are your payments

4. Credit mix, which scores you by having different types of accounts

5. How much credit you've recently applied for. This is how many hard pulls are on your credit report. Hard pulls occur when you apply for credit. They impact your score heavily when they're less than 6 months old. They have no impact after a year, and they disappear entirely have 2 years.

Having no credit cards is bad for your credit score because it means your mix is negatively affected and so is your utilization (no cards means no credit limit).

You should consider getting a couple no fee credit cards so that in a year the effect of the hard pull will be gone but the utilization and mix category will be improved. The age of accounts will probably be worse but eventually it'll catch up. This recommendation is contingent on you always paying the balance off every month so that you incur no interest expenses and keep your utilization low.

Answer 3

The generally accepted formula for maximizing your FICO score is 3 revolving accounts with only one reporting a small balance (~5% of the limit), one open installment account and one open mortgage account. Maintain that combination, with no late payments or other negatives and your score will quickly rise to 800+

Edit: changed "carrying" to "reporting" for clarity.