Navigating credit scores can be confusing and frustrating. Even if you have a low credit score or no credit history, there are ways to build your credit without obtaining a regular credit card. You should seriously consider these options if you have a history of late payments or your employment is not secure. It is too easy to get a credit card and quickly rack up a balance and fall behind on payments, which will only hurt you financially and emotionally. This article shares several ways you can build or improve your credit score without a traditional credit card.
by Christian Scully
Credit reports are unfortunately a flawed and necessary evil we have to deal with. They are confusing, can change for no apparent reason, can go down when you think you've done something good and certainly cause a lot of stress for people in today's world. Because financial education is mostly not taught in school and the bulk of that education needs to come from parents and mentors, most kids don't understand the importance of a good credit score. I would argue that most kids don't even know what a credit score is. At least I like to think that because I certainly didn't!
Like a lot of young people with no concept of personal finance, I destroyed my credit score in college, borrowing money to pay for living expenses without a thought of how I was going to back the money back. By the time I first started learning about personal finance and began working towards buying our first house, my credit was in the low 500's... not good. It took about 18 months to get the credit score to above a 620 to qualify for a decent interest rate on a government backed mortgage.
A lot of people will be in this category and will need to commit to digging their way out of the bad credit hole. Another group of people, however, will have never opened a credit account and thus won't even have a credit score. I've had borrowers seeking my help with applying for a mortgage with no credit score. In this case, there are things you can do to get the credit bureaus to calculate a score for you and to start building a good credit history. The following are a few of the best ways you can either build credit from scratch without a credit card, or to start repairing bad credit.
Remember that if you are recognizing that your credit score is less than ideal, and you are motivated to improve it, you are already ahead of the game! So many people never even think about it and just continue missing opportunities or struggling due to poor credit. It takes time to improve, but not as long as you may think! Stay focused on your goals, know why you are trying to improve your personal finances and credit rating, and you will keep doing better every day.
Report your rent and utility payments to major credit bureaus.
Rent and utility payments - like gas, electricity, cable, cellphone plans - aren't typically reported to credit bureaus, so they aren't factored into your FICO credit score. However, if you were to add these as what are called "tradelines" to your credit history, you may be able to demonstrate a history of on time payments without taking on additional debt. The idea is that you already make those payments, might as well get some credit for them!
There are a few different ways you can report rent and utility payments to the major credit bureaus. There are services you can pay for that will confirm your past monthly payments for an account, and can confirm and report them on a monthly basis. Typically these services will charge an initial set-up fee of $50-100 then a monthly fee of $5-10 to report the on time rent payments.
If you pay your landlord or property management company online, ask them if the online payment service they use can report your rent payments to the credit bureaus. There are many that now have this option. It may be as simple as turning this feature on in your account settings.
You can report these payments for free to Experience with their Experience Boost service. The service is completely free and can add 10 or more points quickly. This could be very valuable if you are applying for a mortgage or a loan and are close to the next tier of credit score and want to qualify for a lower interest rate.
Get added as an authorized user on a family member's credit card.
When I was working towards raising my credit from the low 500's in order to qualify for a mortgage for the first time, we added my name to one or two of Britt's credit cards. Brittany, fortunately, had never destroyed her credit score and had been diligently paying her bills on time. Just being added as an authorized user added 40+ points to my score. All of a sudden I could piggyback on her good payment history and the age of the credit accounts. This is a great strategy if you are on a strict credit repair plan with a partner.
You can also ask a parent or guardian if they are willing to add you as an authorized user. But remember that once you are an authorized user, any mistake you make with the credit card can hurt the other person, and vice versa. Never ask to be added to someone's credit card if you know they have a history of making poor financial decisions, or are not secure financially. And being added as a user does not mean that you actually have to use the card. Just stick it in a drawer and forget about it. Just having the available credit and the added credit history will likely increase your own credit score.
Apply for a secured credit card.
A fairly simple way to build credit is to apply for a secured credit card. You can check your local banks, credit unions and online financial service providers for different cards. With a secured credit card, you will provide the credit provider with an upfront deposit that will secure your card. You will be then be able to use the card, up to the limit of your initial deposit. You will make monthly payments on the card and those payments will be reported to the credit bureaus, gradually building your credit. After a few months of on time payments you can request that your credit amount be increased.
Take out a secured loan with a local credit union.
Similar to the secured credit card, you can also reach out to your local credit union for a secured loan. With a secured loan, you are borrowing a loan using a savings account or certificate of deposit that you have with the lender as collateral. So if you have a savings account with a local bank, you may be able to take out a loan using your savings as collateral. The biggest difference between the secured loan and the secured credit card is that the credit card can be used and paid back on an ongoing basis, and the loan is a one time disbursement. Once the loan is paid back you will have access to your savings account in full and you will have added a quality tradeline to your credit report.
Don't miss a single payment for any auto or student loan.
If you are looking to raise your credit score and already have a car loan or student loans, prioritize paying those accounts on time every month. Even having one late payment can potentially affect your ability to qualify for a mortgage, for example. Even if your credit score is low and you are focused on finding a way to add new accounts, pay your car and student loans religiously. If you can't afford your student loan payment, don't just skip it. Contact your loan servicer and ask for assistance. It is much better to work out a solution directly with the loan collector than to skip the payment and hurt your credit rating.
+ Better Tips
Don't keep applying for new credit cards.
If you have applied for a credit card and been denied, or you know that your credit score is very low and have a feeling you will be denied a card, then consider avoiding the hard inquiry on your credit report. A hard inquiry is added to your history any time you attempt to open a new line of credit and the credit provider requests your credit report from Experian, TransUnion or Equifax. Hard inquiries stay on your credit report for 2 years, and they can lower your score if you have too many of them without opening up any new credit. If you rack up several hard inquiries from different types of lenders, it gives the impression that you are not credit worthy. Consider taking out a secured loan or opening a secured credit card as a first step to building back your credit.
Regularly track your credit score.
If you are reading this then clearly you are starting to take your credit seriously. Maybe you have a specific goal in mind like qualifying for a low car loan rate or getting approved for a mortgage. If you haven't already started to regularly track your credit score, you can use the following resources. Even if your score is depressing, the only way to make change is to make progress. Look at your score and finances regularly and you will be more likely to achieve your goals.
You can request a free copy of your TransUnion, Equifax and Experian credit reports at www.AnnualCreditReport.com. This site is authorized by the Consumer Financial Protection Bureau of the US government. Services like CreditKarma.com are also useful to regularly track your score on a weekly basis. CreditKarma uses the VantageScore, which is different from the FICO score that most lenders use, but it will still be a helpful guide and will get you in the habit of keeping your credit and financial profile on top of mind.
File any complaints directly with the CFPB, and file a dispute directly with the credit bureau.
The Consumer Financial Protection Bureau exists to protect borrowers from unfair lending practices and harmful financial products. If you have any issues with lenders or financial services companies that can't be resolved, reach out the the CFPB. Similarly, if there is incorrect information on your credit report, contact the credit bureau directly to dispute the information and clean up your credit report.
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Real Estate + Money
Thoughts, ideas, lessons-learned, inspiration, how-tos and more from a journey in small business, to owning and investing in real estate, helping borrowers navigate the mortgage process as a licensed loan originator, in an ongoing pursuit to fund the life and retirement that is chosen, not accepted.