Debunking myths: You don’t need loans, credit cards to build credit – Here’s how!
Staying in debt isn't necessary to maintaining a good credit score, especially when young
Dubai: If you think you need loans or credit card debt to build a good credit score, think again. While debt-free living is often seen as a financial goal, maintaining a healthy credit score without carrying debt is not only possible but also practical.
A common misconception is that staying in debt is necessary to maintain a good credit score. You might have even heard that leaving a small balance on your credit card is a good strategy. The truth is, you can build and maintain a strong credit score without carrying any debt.
How to build credit without debt
To achieve a good credit score, you need positive activity on your credit report—not outstanding debt. You can do this by:
Prudent use of credit cards: Make purchases with your credit card and pay off the full balance each month. This keeps your credit utilization low and shows lenders you can manage credit responsibly.
Avoiding inactivity: If you have a credit card, use it periodically to avoid account closure due to inactivity. Even small purchases paid off immediately can keep your account active.
Making on-time payments: Whether it’s a credit card, utility bill, or loan, paying all your bills on time is critical. Payment history is the biggest factor in your credit score.
Impact of paying off debt
If you’re paying down revolving debt like credit card balances, you’re likely helping your credit score. Your credit utilization rate—how much credit you’re using compared to your total limit—matters. The lower the rate, the better for your score. Paying off an instalment loan (like a car loan) might cause a small, temporary dip in your score, but it’s generally not a big concern.
Can you be truly debt-free?
Most people use debt for major purchases, such as a home or car. However, you can still be considered debt-free if you’re not carrying revolving debt from month to month. It’s more about managing debt wisely than avoiding it altogether.
Stay on top of your credit
You don’t need debt to have a good credit score, but you do need activity. If you don’t use credit at all, your score might stagnate or your accounts could be closed for inactivity. You can monitor your credit score through several freely-available online tools, which can also help you spot signs of potential fraud early.
Debt-free myth debunked! What's next?
You can achieve financial freedom and a high credit score simultaneously. The key is consistent, responsible use of credit—not carrying debt. By understanding how credit scores work, you can make smart financial choices without worrying about your credit score taking a hit.
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