You might think that your credit has everything to do with your credit card.
But, in fact, your credit report and score aren’t as closely tied to those slips of plastic as you might think. Because only a small portion of your credit score is based on having and using revolving credit, even people who aren’t comfortable relying on credit cards like this woman who eschewed credit cards for six years—can build a respectable credit score. (For the rest of the factors and how much they affect your credit score, see Credit Scores 101.)
And your credit report, which documents every line of credit you’ve had for potential lenders, can be improved without ever swiping a card. (Though, keep in mind, having a credit card—if it’s used correctly—can be good for your finances.)
But there are ways you can build credit without swiping a card. Here’s how.
Report Your Rent
Two of the three major credit bureaus, Experian and TransUnion, now accept rent payments for inclusion on your credit report. The payments must be uploaded by third-party service like RentalKharma (currently free), RentReporters ($10 per month) or WilliamPaid (free when you pay your rent from your bank account via the site). None of these services depend on landlord participation. Note that although the rent payments will show up on your credit history, they do not yet factor into your score.
Put at Least One Household Bill in Your Name
In general, utility, internet and phone service providers only show up on your credit report if the account is in collections … which doesn’t exactly reflect well on the borrower. This is starting to change, though—some major providers report all payments. Call your providers to find out if they do. Even if they don’t, most are happy to provide a letter of reference upon request for an account holder in good standing. Although it won’t affect your credit, you can show the letter to a potential creditor—a loan officer or landlord, for example—who might give it favorable consideration.
Address the Issues Affecting Your Score
For one person, a low score might be caused by late payments or collection accounts; for another, high balances; for another, “thin” credit—too few entries for the evaluator to make a determination about creditworthiness. For others, the culprit could be a reporting mistake (which you can detect and follow using this guide).
Building your credit means addressing the specific issues that affect your score. If you’re unsure which factors are causing your score to dip, contact the reporting agency and talk to a customer service representative. Studies suggest that up to 25% of credit reports can contain serious errors, such as outdated personal information, mistaken or fraudulent accounts, and incorrect account details. Fixing these errors can give your score an immediate bump.
Open a Bank Account
Bank accounts don’t factor into your credit score, but the relationship you have with your bank might lead to financing opportunities. A customer with accounts in good standing—no overdrafts, for example—is far more likely to be considered for a loan from that bank than an applicant off the street. If you’re unhappy with your bank or are uncomfortable with traditional banks, you may want to consider opening an account at a local credit union. They tend to offer more generous terms (like no fees) on checking and savings accounts, but aren’t necessarily the best choice for everyone. Before switching, make sure a credit union is the right fit for you.
Obtain a Loan
The bank where you are a customer in good standing is a great place to start looking for a small loan, like an auto or personal loan. If your credit isn’t good enough, apply for a secured loan, using your cash assets as collateral. You’ll be allowed to borrow as much money as you have in a specified account (usually a savings account or Certificate of Deposit), and the funds in that account will be at least partially inaccessible until the loan is paid off. It’s a great way to build credit because the loan will show up as an installment account (a loan with a regular, fixed payment) on your credit report, and payments will be factored into your credit score.
Maintain Steady Employment
Employment is not part of your credit score, but it does show up, and in addition to a good score and a clean credit history, is required by most lenders. You don’t have to keep the same job, but lenders prefer to see that you’ve stayed with a single employer. Part-time jobs and periods of unemployment are considered at the discretion of the lender. If you’re not working, you’ll need to document another source of income in order to qualify for financing.
Get a Secured Credit Card
Not to be confused with a prepaid card, a secured card is guaranteed by cash that you deposit, so it doesn’t present the opportunity for consumer debt that a regular card might. You use a secured credit card like any other credit card—you make purchases and then pay the bill when it arrives. Your credit limit is the amount of collateral (cash) deposited on the account. You don’t spend that balance down-—rather, it stays in the bank, and you must pay for your charges each month like you would with any other credit card. (Debit cards, on the other hand, are attached to a balance that goes down with each charge.) Before you apply, be sure the card issuer will report your payment behavior to all three credit reporting agencies. To build a payment history, pay one monthly bill with your credit card, then pay off the card balance each month.
Pay On Time
Pay all of your bills on time. Your payment is reported by a computer to a computer, so while it’s true that in some cases the later the payment is, the worse the consequence, at the end of the day … late means late. A payment will be marked as “past due” if it’s late at all, even “only” one day. Also, your credit report cannot explain to a reviewer that you had extenuating circumstances—only whether your bills were paid, and whether they were paid on time. If you run into financial difficulties, work out a payment plan with your creditors before you miss a payment.
Don’t Ask Anyone to Co-Sign
Instead of asking someone with good credit to cosign for you, a better way to build a healthy score and history is to start with a bank account and a secured credit card on your own. When you ask someone to cosign, you ask that person to put his credit score at risk, which can lead to any number of problems and complications … not least of which is discord between friends and family members caused by unforeseen financial difficulties. And the reward is small: If you are the secondary borrower on a cosigned loan, the positive effect to your credit is not substantial. (The negative effect for default, however, is significant.) If you’re currently on a cosigned account, pay it as agreed, but if at all possible, avoid asking for cosigners in the future.