5 Ways to Improve Your Credit Without a Credit Card

A man cutting up a credit card with scissors

Cutting up a credit card | Source: iStock

In the wake of the recession, Americans are growing more cautious about debt, and many are even choosing to completely forego credit cards. According to a Bankrate study, 63% of millennials don’t have a credit card. But even if you decide not to support credit card companies, a favorable credit report will likely be essential at certain times in your life. Your credit report can be used to evaluate your applications for insurance, employment, loans, credit, or renting an apartment.

A credit report contains your personal information and important parts of your financial history, such as whether you pay your bills on time or have ever filed for bankruptcy. This report helps to determine your credit score. While 700 is generally thought of as a good credit score, usually sufficient for obtaining a home loan, 750 to 850 is the optimal range and will help you get you the best interest rates.

Your FICO score is determined by five factors: 35% of the score comes from your payment history, 30% from how much of your available credit you’re using, 15% from the length of your credit history, 10% from new credit, and 10% from your credit mix. Depending on the situation, your credit score, your credit report, or both may be assessed. While using credit cards wisely is an easy way to maintain a healthy credit score as well as a favorable credit report, there are other ways to build credit.

1. Fix errors on your credit report

Credit report dispute form

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You are entitled to a free credit report every year, which you can request from AnnualCreditReport.com. It’s important to check your report regularly for errors, as this could have a significant impact on your credit. According to a 2013 report from the FTC, one in five consumers had an error in at least one of their three credit reports. To report an error, visit FICO’s website for instructions on how to make corrections to your report. Checking your credit report once per year could also help you catch fraudulent activity or identity theft.

In a recent settlement with the state of New York, the three major credit reporting agencies (CRAs) agreed to several reforms, including improving the dispute resolution process, instituting a waiting period prior to reporting medical debts, and increasing the visibility of AnnualCreditReport.com. Many consumers are unaware of their legal right to one free annual credit report from each CRA, and the agreement further requires CRAs to provide a second free credit report to consumers who experience a change in their credit report as a result of initiating a dispute.

2. Pay rent and utility bills

Writing a check

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Rent payments can help you build credit, but only if you report these payments yourself via a third-party company. These websites will report your rental payments to the credit bureaus, but there is often a monthly charge to do so. For utilities and other monthly bills, normally these payments only affect your report if they show up as delinquent.

But in some cases, utility companies will report positive payment activity or you can contact the company and request it. While rent and utility payments don’t affect your credit score, they can positively impact your credit report, at the very least by showing an absence of unpaid bills.

3. Get a loan and make payments on time

Student loans

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Paying back installment loans on time is one of the most effective ways to improve both your credit score and credit report. Whether it is a mortgage, car loan, or student loan, making your monthly payments on time will build and maintain credit. If you don’t have any loans to pay back and you’re worried about approval, try joining a credit union rather than a traditional bank.

It might be easier to get a loan approved, as credit unions look at more factors than your FICO score and lending history, such as employment. Credit unions and community banks also typically offer credit-builder loans, also known as secured loans, with the specific purpose of helping members build credit. A credit-builder loan uses money in an existing account or ownership of property as collateral.

4. Piggyback on someone else’s credit

Wedding bands and credit card

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One way to avoid using a credit card is to sign on as an authorized user on a friend or family member’s credit card. You don’t have to actually use the credit card, but as an authorized user, your credit will get a small boost from the primary cardholder’s activity. Just make sure you sign on with someone you trust. If this person makes late payments, that activity will reflect on you as well. Fortunately, if you are unhappy with the account holder’s activity, you can remove yourself from the account. In some cases, you may be able to get another person’s activity removed from your credit report as well, by disputing it with the credit bureaus. So-called “piggybacking” isn’t the solution for everyone, but FICO does not object to this practice when it’s done properly.

The most controversial aspect of piggybacking in recent years has been the fraudulent practice of artificially boosting credit scores, sometimes in order to get approved for a mortgage. In these deals, a complete stranger accepts payment to add a piggybacker as an authorized user without ever receiving a card or dealing with the account in any way.

5. Apply for a secured credit card

Secured credit card

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A secured credit card is similar to a traditional credit card, but you’ll be required to make a deposit to the issuing bank or credit union to be used as collateral. Then you will be issued a card with a credit limit of that amount. Make sure your bank reports to all three credit bureaus, and ask about applicable fees and interest before signing up. Secured credit cards are typically used by people who need to rebuild their credit after bankruptcy, but they can also be used to establish a credit history.

Secured cards have annual fees and higher interest rates than unsecured cards, so some experts recommend them only as a stepping stone to a traditional credit card. Howard Dvorkin, chairman of Debt.com, warns secured credit cards are like the good, the bad, and the ugly:

Some are good. They have low fees and treat customers as customers instead of as cattle. The bad ones take advantage and extort the clients because of their situations. Then there’s the ugly, which are completely despicable. They’ll give you the card, but you have to buy this insurance policy for $55 a month.

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