Money

How to improve your credit score—without using a credit card

No plastic, no problem

College students build credit by paying student loans Credit: Getty Images / Jacob Ammentorp Lund

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Whether you need to apply for a loan, rent an apartment, or pass an employment background check, having a strong credit history is vital. It can affect what interest rates you’re offered, plus other things you may not expect, like whether you’re approved for a phone service or other utilities.

Generally, building credit means showing you can borrow money and pay it back as agreed. Using a credit card is one way to build credit. A secured credit card can be a good option if you’re new to credit or you have a spotty credit history. You can also build credit as an authorized user, meaning someone—usually a friend or family member—adds you to their credit card account.

With or without a credit card, you may have a credit score if you’ve taken out another type of debt, such as a student loan. Or, you could be among the one in 10 Americans without a credit history at all. You can check your free credit score a number of ways: with free credit-monitoring services, free accounts with certain credit card issuers, and even your bank or credit union.

That said, credit cards aren't for everyone, especially if they tempt you to spend more than you can pay back. It is possible to build credit without a credit card—you'll just use different approaches. Here's five ways to get started.

1. Get a credit-builder loan

A credit-builder loan isn’t a loan in the traditional sense. You apply for a lump sum of money with the lender—but if you qualify, the lender won’t give you the money just yet. They put it in a savings account on your behalf and hold it as collateral as you make payments over time, usually about 12 months.

When your loan is completely paid off, you can access the money. This affects your credit score in two ways: You’ll add an installment loan to your credit mix and build your credit history by making on-time payments. Plus, you’ve set aside money for future financial needs. Look for these at credit unions and small banks.

The downside to them, of course, is that you don’t get the money right away. "You want to make sure you understand the terms and know you can afford the monthly payments," says Katie Bossler, financial expert at GreenPath Financial Wellness, a national nonprofit service, adding, "Also make sure paying the interest is worth it to you."

2. Start paying your student loans

Most federal student loans don't require you to have an established credit history to qualify—a rarity in the borrowing world. Using one of these can not only help you fund your higher education, but also establish a credit history.

For one thing, student loans help you round out your credit mix, which makes up a small part of your credit scores.

Lenders like to see that you’ve managed revolving debt (like credit cards) along with installment loans (like student or auto loans, or a mortgage).

Depending on your loan terms, you might not have to make payments while you're in school. But if you can afford it, there are two major benefits to getting a head start: You save money in the long run and establish good credit-building habits.

For example, if you take out a $5,000 loan with a 4.53% APR during your freshman year, interest-only payments would come out to just under $19 a month. Because interest compounds, you avoid paying interest that would have collected on that amount. And if your loan servicer reports your payments to the major credit bureaus, you start building credit while in school.

Just be sure that you’re making on-time payments, which can help you earn a good credit score, while late payments can negatively impact your credit. One way to ensure timely payments is setting an alert or signing up for automatic payments, typically through a checking account. When the bill is due, the lender will automatically take the specified amount from that account, and some lenders, especially with student loans, even discount your annual percentage rate (APR) when you set up autopay.

3. Apply for a loan

Generally, loans can help you build credit as long as the lender reports your payments to the credit bureaus. You'll typically need an established credit history to get a car loan or mortgage, while a personal loan may have looser requirements.

Most loans come with a set monthly payment, which can help you stick to a predictable budget. You may prefer this type of repayment over a credit card bill, which can fluctuate depending on the charges you've made.

"If you think a credit card will open a can of worms, perhaps a loan offers a more disciplined approach," Bossler says.

But don't apply for a loan with the sole purpose of building credit, Bossler says. Consider using a loan only when you need to borrow the money and the loan terms are affordable to you. When you do take out a loan and make monthly payments on time, it can help build your credit history.

4. Get credit for your rent and utility payments

While homeowners get a positive mark on their credit reports for paying their mortgage, renters don't automatically get credit for forking over their own monthly rental payments. Services such as RentTrack and LevelCredit want to change that, although they use different approaches.

When you sign up with LevelCredit, the company connects to your bank account, finds your rent and utility payments, and reports them to the credit bureaus. With RentTrack, you actually pay your rent to the company. RentTrack then pays your rent on your behalf and reports the payments to the credit bureaus. Both services cost a monthly fee of about $7 to $10.

These methods create a new tradeline, or credit account, on your credit reports. Credit-scoring companies may use the tradeline information when calculating your credit score. Using one of these services can be a good option if you don't otherwise qualify for a loan or credit card, and if you pay rent on time every month. LevelCredit says their users reported an average credit score increase of 20 points over two months and 50 points after two years.

5. Use Experian Boost

Traditional credit scores are mostly based on your history of borrowing money using loans and credit cards. But new tools in the industry, such as Experian Boost, supplement that information with alternative data, such as phone and utility payment information. Basing credit scores on a wider set of information allows more people to establish credit.

Here's how Experian Boost works: You allow Experian to access your online checking and savings accounts. Then, the credit bureau identifies your telecom and utility payment information and adds it to your Experian credit reports. FICO Score 8, which is one of FICO's credit-scoring models, uses this data when calculating credit scores. On average, Experian says, users who received a boost improved their FICO Score 8 by 13 points.

"For someone who's got a limited credit history or is in the fair to poor credit score range, this can be an opportunity to get credit," Bossler says.

Bottom Line

Building a positive credit history is an important part of your overall financial life, but it doesn't require a credit card. And you shouldn't be discouraged if you have bad credit. Instead, you can use one of the methods here. Taking out a credit-builder loan, paying back your student loans, getting credit for rental payments, and using new tools like Experian Boost can all help you build credit.

And if you decide to apply for a credit card later on, you'll have a strong credit foundation to qualify for one with affordable terms and a great rewards program.

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Common Credit Card Terms

  • Authorized user: A person who is authorized to use someone else's credit card account. The primary account holder owns the account and is responsible for making the credit card payments. Being an authorized user allows you to piggyback on the primary account holder's credit standing.
  • Credit: Credit is the ability to borrow money, but it's important to understand how using it impacts your overall financial health. As you use a credit card, the issuer reports your account activity to agencies called credit bureaus. (The three main ones are TransUnion, Equifax, and Experian.) The bureaus use this information to create statements called credit reports. Credit-scoring companies (such as FICO and VantageScore) analyze the information on your credit reports to calculate your credit scores. The scores are designed to communicate how well you've used credit in the past, and they predict the likelihood you'll pay back money on future credit accounts.
  • Credit limit: The maximum amount you can charge to your credit card. Once you hit the credit limit, you need to pay down some or all of the balance before the issuer replenishes your credit line.

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