How to Maintain Good Credit Without Debt

Credit is a system of trust, and that trust can only be established through experience. It doesn’t really matter how you get started — a credit card, student loans, a personal loan, asking someone else to co-sign a loan or add you as an authorized user to their credit card — but you have to use credit in order to build it. Why? Because without using credit, you have no payment history, which is one of the major ways lenders determine whether or not they can trust you to repay a loan.

The Difference Between Credit & Debt

Using credit isn’t the same as going into debt, not that debt is always a bad thing. Taking on debt responsibly can help you accomplish certain goals in life. For example, taking on an affordable amount of student loans can be an excellent decision, because college is a smart investment in your future.

Installment loans — auto loans, mortgages — tend to be reasons people want to have good credit in the first place. Revolving credit is one of the best ways to get to that point: Use it, and pay off the balance before accruing interest on it. People are understandably wary of revolving credit (like credit cards), because they present the possibility of falling into debt. It certainly takes discipline, but it’s the easiest way to build your credit so you can qualify for a larger loan you may really need and want down the road.

How to Use Credit Cards Without Going Into Debt

No matter if you’re new to credit cards or want to start using them debt-free, the concept is very simple: Pay your statement balance every billing cycle. By not carrying a balance, you pay no more for the items you charge to your card than if you paid cash, meaning you’re not in debt.

If you’re a frequent credit card user, you’ll likely always have a balance on your account, but you need to understand the distinction between carrying a balance from month to month and regularly paying your balance in full: The difference is the consumer carrying a balance over to the next billing cycle will have interest tacked onto that balance (here’s an explainer on APR, if you want to read more about this concept).

By tracking your spending and staying on budget, you can easily build credit without going into credit card debt. You can set your bill-payment preferences to automatically pay the statement balance each billing cycle, or you can go in and pay off your balance as often as you want — some people like to pay for charges as soon as the transaction goes through, because it makes them more comfortable than building up a balance over the course of a month.

That strategy can also help you keep your credit utilization rate low. After payment history (making loan and credit card payments on time), credit utilization has the largest impact on your credit score, so you want use as little of your available credit as possible — 10% is ideal, but keeping your utilization (total balances divided by total limits on revolving accounts like credit cards) below 30% is great.

Alternative Methods

There are some other ways to build credit without putting yourself at risk of going into debt. Alternative credit reporting agencies offer services to track non-credit bill payments, like rent and utility payments. This can be a more difficult route to take than using a credit card, and you’ll probably have to pay for such reporting options. Also note that some alternative data, while being included on your credit reports, may not be reflected in your credit score depending on which scoring model you’re using.

As you build credit, you’ll want to track your progress. Keep in mind credit scores regularly fluctuate (though sudden drops in score could be cause for concern), but checking the same credit score regularly will allow you to see how your credit use impacts your creditworthiness. Using free tools like the Credit.com Credit Report Card, you can easily get yourself on the right track to better credit.