When Debt Can Be Useful

En español| Debt is a two-edged sword. Some of us have too much if it. Others — surprisingly —have too little. It might sound prudent to throw away your credit cards and pay for everything by check, debit card and cash. But going all-cash can trip you up, says Gerri Detweiler of Credit.com, a consumer credit website. If you have no debt, you have no credit score. That complicates your life.

 Credit scores are created from the monthly reports that lenders send to credit reporting companies. Your score reflects how many creditors you have, how much you owe, how fast you pay, the size of your credit lines and any defaults. It also incorporates information from the courts, such as bankruptcies or tax liens.

Lenders depend on credit scores to measure how likely you are to repay a loan. The most widely used score, from a company known as FICO, ranges from a high of 850 down to 300. With a score of 750-plus, you can generally borrow or get a new credit card on the best possible terms, says John Ulzheimer of the consumer site CreditSesame.com. At 700-plus, loans are still competitively priced. Below 600, don't bother asking. With no score at all, you don't exist.

Your score could vanish. If you ever had loans or credit cards in the past, you might assume that you always have a score, even though you currently operate debt-free. But that's not so. Your score could vanish if you've had no activity on at least one credit line in the past six months, says FICO's Anthony Sprauve, a senior consumer credit specialist. No score usually means no loans.

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Being "unscorable" might not bother you, if you gladly gave up credit cards and debt. But scores touch your life in many other ways, Detweiler says. Without a score (or a high enough score), you might not get a discount on your auto or homeowner insurance. Utilities might require a higher deposit if you move to another town. If you sell your house and want to rent an apartment, the landlord will probably require a good score before giving you a lease. Credit checks are usually required for cable and cellphone service.

If you're married, you acquire a credit score by having personal debt or by sharing debt with your spouse — for example, by applying jointly for a credit card. If one of you dies, shared cards are usually canceled. To keep them, the survivor needs to reapply. You might be given a lower credit limit if your income has declined.

One card is enough. No financial adviser (I hope!) would suggest that you take a mortgage or car loan just to keep your credit score alive. All you need is an active credit card. To get a good score, you don't even need a variety of credit sources, Sprauve says. One card is enough, provided that you've had it for several years, use it once or twice a month— say, for small purchases such as groceries or gas — and pay in full when the bill comes in.

If you have a credit card that you've been keeping in a drawer for emergencies, check to see if it's still good. The lender might lower your credit limit or even close the account if you haven't used it for 12 to 18 months, Ulzheimer says. To reactivate the card, you might have to apply for it all over again.

For those whose problem is too much debt, credit cards are a trickier issue. Should you, or should you not, cut them up? You're at a danger point if your payments exceed 40 percent of your monthly income. Among people 55 and up who carried debt in 2010, 8.5 percent hit that perilous mark, the Employee Benefit Research Institute reports. (Those are the latest numbers available.) A much higher percentage of people 65 and up carry debt — and a larger amount of debt — than was true 15 years ago. Bankruptcy rates have risen, too, especially among those 75 and up.

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Cutting up cards makes sense when you're digging out of debt. But save at least one of them and use it once a month. It's your door to good credit when, finally, you're debt-free.

Jane Bryant Quinn is a personal finance expert and author of  Making the Most of Your Money NOW.

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