How To Build Credit Without a Credit Card
The average FICO credit score has increased by 14 points since 2010, reaching an all-time high of 703 in 2019. According to a recent report by the credit bureau Experian, this noticeable rise is recognized across generations.
Whether you’re starting out, or if you’ve been working to improve your credit score for many years, it’s possible to achieve a substantial boost in your ratings with the right information. In this article, we give you that information.
You’ll learn what a credit score is and how to interpret yours before we give you 10 top tips on how you can improve your credit rating without needing a credit card account.
What is your credit score?
How to interpret your credit score
How can I improve my credit score? 9 top tips to boost your credit score without a credit card
Let’s get started!
What is your credit score?
Your credit score is a measure of your financial health. This information is held by credit reference agencies who check whether you’re a reliable user of credit who pays their bills and repays loans. This information is vital to lenders, such as credit card companies, banks, and mobile phone providers. These lenders will consult credit checkers before handing out a loan to you.
According to CNBC Select, having a good credit score will save you money and help you:
Qualify for rented accommodation.
Get the best rates on car and homeowner insurance.
Borrow money at a cheaper rate.
Develop a good reputation as a borrower.
Understanding your credit score and how to interpret it
Over 40% of Americans have a FICO credit score under 700. But what does this mean?
Firstly, the FICO system is a method of credit scoring that was developed by the analytics company Fair Isaac Corporation (FICO) in 1989. Other systems exist, for instance, FICO’s biggest competitor is VantageScore, a scoring system developed in 2006.
Despite the competition, FICO remains the most popular choice. As such, many consumers think FICO ratings are synonymous with a credit score.
The basic FICO scores range from 300 to 850. The higher the score, the more attractive you are to lenders. Your credit score is calculated using different data points from your credit reports, with specific attention to the following 5 categories:
35% of your FICO score is based on your payment history. Bankruptcies, liens, repossessions, foreclosures, or late payments will adversely affect your score.
30% of the score is based on the amounts you owe. Having different credit card accounts in your name isn’t necessarily a bad thing, but owing too much will adversely impact your score.
15% is based on the length of your credit history. That is, the longer your track record of payment, the better your score. FICO factors in the average age of your accounts and the age of your oldest accounts.
10% is dependent on your credit mix. It’s good to show you can handle different types of credit, from mortgages to credit cards and installment payments.
10% is based on your recent search for credit. You want to avoid too many hard credit searches from lenders in a short period, as this can indicate risky borrowing.
A credit score of 700 or above is considered good. And a score of 800 or above is considered excellent. Whether you have a low credit score or a high one, it’s always in your best interest to increase it. The next question is, how do you increase your credit score?
How can I improve my credit score? 9 top tips to boost your credit score without a credit card
Above you found out how the FICO credit scoring system is broken down, with different categories weighted according to their importance. 35% of your score is based on your payment history. Having a credit card to consistently pay back credit will bump up your credit rating. Credit cards also show you’re able to handle different types of credit, again working in your favor.
Yet, also note that credit cards aren’t the only factor considered when calculating an individual’s credit score. Hence, there are other ways to boost your rating beyond owning a credit account. Listed below are 9 top tips explaining how you can do this.
Tip #1: Check your credit score
To improve your credit score, you have to know what your credit score is in the first instance. Knowing your credit score will indicate how much improvement you want to achieve.
The top three credit rating agencies in the US include Experian, Equifax, and Transunion for consumer credit reporting. These agencies control nearly the entire market. Use these rating agencies to check your credit. Note that checking your credit won’t affect your credit rating.
From your credit report, you’ll be able to identify your biggest problem areas. This includes missed payments, unpaid debt, or maybe your account is linked with an ex-financial partner who drags down your score. Use your credit report to guide your priority steps.
Tip #2: Get a credit builder loan
With a credit builder loan, you’ll put aside a set amount of money into a secure account. Usually, the amount set aside is between $300 - $1000. You’ll then make a fixed payment every month until you’ve paid back the full amount.
A builder loan is unlike a normal loan in that you cannot access the money until you’ve paid back the full amount set aside. In this sense, you’re making payments but you aren’t paying extra money. All payments are reported to the major credit bureaus to increase your credit rating.
Tip #3: Manage your household bills
Paying back your utility accounts and rent will build your credit history and show companies that you’re responsible.
While most landlords don’t report your monthly rent payments to credit agencies, this consistent payment structure will demonstrate a pattern of financial consistency.
Make sure your household bill payments (and any payments in that matter) are made on time to avoid cash penalties and APR increases.
Tip #4: Manage your debt-to-credit ratio
You’ll want a debt-to-credit ratio (also known as a utilization ratio) that’s 30% or less. The higher this ratio the slower it will be to build credit.
Let’s say you have a $1000 arranged overdraft limit, and you go $300 into that arranged overdraft. You’d be in a 30% debt. Going into your arranged overdraft by more than $300 would cause a higher debt-to-credit ratio.
Aim for less than 10% in an ideal scenario. More than 50% will make it difficult to achieve a good credit score.
Tip #5: Get on the electoral register
Yes, this means registering to vote can improve your credit score. Getting on the electoral register provides your proof of address. Getting approved for a loan will be challenging without validation of your address.
In this sense, electoral registration is a simple way to potentially add points to your credit score. Even if you have no desire to vote, get registered to confirm your address for credit reference agencies.
Tip #6: Pay the bills under your name
To build credit without a credit card, you need to prove you’re able to make regular payments.
Let’s say you share an apartment. Your housemate pays the bill in their name every month. Even though you’ll pay your share of the bill, if the payment isn’t under your name, there’s no proof you're able to make these regular payments. Your contribution is not reflected in the credit check.
The more bills you regularly pay in full directly from your bank account the better. Credit agencies will see your on-time payment history when they run their report. Ask to transfer bills under your name, or add your name if possible.
Tip #7: Become an authorized user of someone else’s credit card
Obtaining authorized user status is a great way to begin building credit, as long as you and the primary cardholder are on the same page.
As an authorized user you can piggyback from someone else’s credit card and credit activity to positively influence your credit. Firstly, you’ll need to verify the credit card company can report card activity from authorized personnel. Otherwise, you’ll be wasting your time.
There is some risk to this method. If the card user racks up an excessive balance and misses payments, that activity could end up damaging your credit instead of helping it. Only become an authorized user if both members of this partnership are committed to smart credit-building habits.
Tip #8: Take out a personal loan
Some lenders will offer unsecured personal loans to individuals with bad or no credit. These involve borrowing a fixed amount of money and making fixed payments every month. Note that if you don’t have an established credit history, then you’ll likely be charged higher interest rates.
It’s possible to lower your interest rates for fixed loans by getting a co-signer to help your odds of approval for lower rates.
Tip #9: Use a credit-building tool
Building a good credit score essentially comes down to demonstrating that you can actively handle credit and debt for credit agencies. If you aren’t comfortable handling a credit card, your best option is to use other credit-building tools.
For instance, Grow Credit is a credit-building tool that lets you handle your subscriptions to boost your credit profile. You can use Grow Credit’s Mastercard to immediately pay small-scale monthly subscriptions to Netflix, Spotify, Amazon Prime, and many others. Grow Credit is designed to help consumers raise their FICO scores and better their overall credit history. Watch the below video for a visual explanation of how Grow Credit works. Start boosting your credit score today by signing up for an account.
You don’t need a credit card for a healthy credit score
Although owning and using a credit account is a convenient and useful means to boost your credit rating, it’s not the only means.
Improving your FICO score comes down to showing lenders you’re able to pay back your loans and handle different types of credit. It’s possible to do this by taking out personal loans, paying bills on time and in your name, managing your credit-to-debt ratio, and using credit boosting tools such as Grow Credit.
Working to improve your credit score needs to be a priority. Beyond the multitude of benefits given, a high credit rating ultimately saves you money.