Think you have perfect credit hinges to have zero debt? you would be wrong

The higher your credit score, the more likely you are to be flexible when it comes to lending. For example, there are some credit card offers that are reserved for applicants with credit scores above a certain level. And if you’re applying for a car loan or mortgage, you have a better chance of getting approved and qualifying for a competitive interest rate if you have a great credit score.

Meanwhile, the two biggest factors that affect credit score calculation are payment history and credit utilization rate. Payment history refers to how timely your bills are, and utilization refers to how much revolving credit you are using at any one time compared to your total credit limit.

To get great credit, you might think you don’t owe any money on your credit cards. But in reality you would be wrong.

It’s all about percentages.

FICO analyzed consumers with a perfect score (850) to see what they had in common. Not surprisingly, they found that consumers in that category had essentially no history of missing or late payments.

But what was What’s surprising is that many borrowers with scores of 850 are unable to pay off their credit card debt. Additionally, the average amount of debt (excluding mortgage totals) was approximately $13,000.

So how did those borrowers get perfect credit? They kept revolving debt, or credit card balances, low compared to the total spending power the cards provided.

In fact, according to FICO, the average credit utilization rate of consumers with perfect credit is around 4.1%. This means that people with perfect credit rarely use their total credit limit.

Keep your credit card usage to a moderate level

If you want to have perfect credit, or even very good credit, you may think you can’t increase your credit card balance at all. But that’s not true. Keeping your balance low relative to your credit limit may not hurt your score at all. This is especially true if you pay off your credit cards in full each month.

A good credit utilization ratio is generally considered to be 30% or lower. This means you owe less than $3,000 on a $10,000 credit limit.

If you’re someone who likes to use credit but want your score to be as high as possible, one solution is to get higher spending limits across your credit cards. This can often be accomplished by reporting an increase in income to your credit card issuer and requesting a credit limit increase.

For example, a $20,000 credit limit with a $3,000 balance would result in a utilization rate of 15%. This is a more favorable ratio than having a $3,000 balance on a $10,000 limit, resulting in a 30% utilization.

Overall, you don’t have to avoid using credit to have a good credit score. And to be clear, borrowing money in the form of an installment loan, like a mortgage, and paying that debt on time can help improve your credit score. However, one debt that can hurt your credit score is credit card debt. However, if you keep your balance low compared to your personal limit, your credit may not be harmed at all.

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