Imagine working so hard to pay off all of your debts only to discover that living a debt-free life is bad for your credit score and other aspects of your financial life. As bad as it sounds, it is exactly what happens to many who have done away with credit cards and paid off their loans. Unfortunately, for as hard as people work to get out of debt, the world seems determined to keep people in debt in order to reap financial benefits.

Why Does It Happen?
Credit scores are based on the different factors of your financial life. The score is supposed to be a reflection of how responsible you are for paying back debts in a timely manner and how well you manage your financial obligations. When your credit report has no information to gauge, your score goes down considerably. In theory, a person with lots of debt who still pay on time may have a better score than someone without any debts at all. The credit score formula involves a mix of credit card account activity, mortgage loans, student loans, and other types of extended credit. If you have none of those account types, you have nothing to calculate.

Why Does It Matter?
There are many who feel a credit score is worthless because they are living debt-free and have no plans to apply for a line of credit or a loan in the future. However, that assumption can be a costly one. Nowadays, there are many situations were a credit score will make a big difference in your life such as when applying for a job, renting an apartment, or when you purchase vehicle insurance. These companies will often pull a credit report and base rates or job offerings on your credit score because the score is meant shed light on credit risk factors. For someone who is responsible enough to have no debts, an increase in insurance premiums is boldly unfair.

What To Do About It?
If your credit score is suffering because you are debt free, there are things you can do to help the situation. It may not be the most desirable way for you to fix your finances but when it comes to necessity for insurance purposes, you may not have many other choices. Here are some things to consider for upping your credit score:

Get a Credit Card
You may have closed your credit card accounts long ago but using a credit card for normal, everyday purchases and paying off the balance in full at the end of the billing cycle can signal a jump in your score in a few months time.

Apply for a Loan
It sounds crazy to apply for a loan when you haven’t a need for a loan but it can help you get your credit score back on track. You can visit with your bank or credit union and apply for a small personal loan.  A loan officer may be able to advise which is best for your situation. The money loaned can then be deposited into an account and all monthly payments can be automatically withdrawn each month. This may not be the best solution for everyone but it is an option.