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credit & debt

I'm Debt-Free. Why Don't I Have Perfect Credit?

How one manages debt is a key factor to a good credit score.

Q: The FICO credit-scoring system tracks a mix of payments, including auto loans and mortgages. That means those of us who have paid-off cars and mortgages lose points and pay higher insurance premiums. If we're debt-free, shouldn't we get the best rates?

Credit mix is among the factors that make up Fair Isaac's credit score. But "types of credit used" is only one of FICO's five categories, and it accounts for only 10% of your score. If credit-card debt is your only debt, you won't lose points, but you won't get brownie points for your achievement -- and so you can't earn a perfect score.

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That may seem unfair, but there is a bright side. About 15 years ago, Fair Isaac created insurance-risk scores, which assess the likelihood of your making an insurance claim. "Types of credit used" is again one of five criteria measured, but it accounts for a mere 5% of the total. The other factors include previous credit performance, 40%; new credit, 10%; length of credit history, 15%; and current level of indebtedness, 30%. (Find more information about insurance scores.)

Your auto and home insurers may give different weight to your insurance scores in setting their rates, but your lack of debt should have a relatively small impact on your premiums, says Lamont Boyd, of Fair Isaac.

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