Dear Liz: We are retired, our house is paid off and we have no credit card balances. The credit bureau gave us a rather low score and said it was because we didn’t have any debt and no mortgage. Is this fair? Suppose we want to buy a vacation home?
Answer: If you got a credit score directly from one of the three credit bureaus, chances are pretty good it was not a FICO score, which is the scoring formula used by most lenders. Before you conclude you don’t have good credit, consider visiting MyFico.com to buy your FICOs from two of the bureaus, Equifax and TransUnion. (The third bureau, Experian, no longer sells FICOs to consumers, although it still sells them to lenders and other businesses.)
Your scores are good in the eyes of most lenders if they’re 720 or above on the 300-to-850 FICO scale, developed by Fair Isaac Corp. in Minneapolis. If your scores are below that level, you may need to revamp the way you use credit if you want to get a good rate on any future loan.
Having an installment loan, such as a mortgage or car loan, can help but typically isn’t essential to boosting a score. More important is how you use your credit cards.
If you don’t use your cards at all, your issuers may stop updating your accounts to the credit bureaus, and that could hurt your scores.
If you use your cards too much — charging more than 30% of a card’s limit, even if you pay the balance in full — you can likewise damage your numbers.
The key is to use your cards lightly but regularly, and pay your balances in full. You don’t need to carry balances or pay interest to have good FICO scores.