Whether you’re completely new to using credit or simply doing your best to avoid debt, you might find there’s one annoying side effect: You don’t have a good credit score. Maybe you don’t have a score at all.
Although that might not seem like a big deal, especially if you don’t plan to borrow money anytime soon, it can still present problems in other areas.
For example, when healthy food blogger Vered DeLeeuw and her husband first moved to the United States, they didn’t have a credit history. “It was very difficult,” she said. “It was difficult to rent an apartment, to lease a car, even to buy a cell phone. Everyone wanted to see a good credit history.”
The truth is, it’s really tough to get by without decent credit. And one of the easiest ways to build credit is to open a credit card or take out a loan. But what if you don’t want to take on debt just to get a good credit score? You still have options.
How Do You Establish A Credit Score In The First Place?
Though there are a few competitors, including VantageScore, FICO credit scores are used in more than 90% of lending decisions made by financial institutions, according to Shawn Lane, co-founder and COO of the credit repair company FRS Credit.
In order to generate a FICO credit score, you need to meet three requirements:
- Your credit report shows at least one tradeline (credit-based account) that has been open for a minimum of six months. Lane noted that this account can’t be in collections or be in dispute.
- You also have at least one tradeline with activity that’s been reported to the credit bureaus within the past six months. Again, it can’t be a collection account and can’t be in dispute.
- Your credit reports don’t show an indication that you’re deceased. That might seem strange, but it sometimes happens if you share an account with someone who died.
If you don’t have any accounts that have been open or active for at least six months, you don’t have a credit score.
Ways To Build Credit Without Debt
You don’t necessarily have to open a new credit card or take out a loan to establish a credit score. The same is true if you want to improve a score that’s been bruised and battered by financial missteps. These alternatives probably won’t send your score soaring into the 800s, but they will help you establish a credit history or bump up a bad score.
1. Sign up to have rent payments reported to the credit bureaus.
Eventually, DeLeeuw and her husband were able to rent an apartment by putting up a large cash deposit. Once a rental agreement was in place, they asked the building manager to report their rent payments to the credit bureaus. “She agreed, and that’s how we started building credit without actually taking on debt,” DeLeeuw said. “We simply made sure to pay our rent on time.”
Newer versions of the FICO score, including FICO 9 and FICO XD, consider rental information when calculating your score. So does VantageScore. However, most older versions of FICO that are widely used today do not consider rent to be a tradeline that gets reported to the credit bureaus. In fact, FICO estimates less than 1% of credit reports contain rental information.
The good news is that there are a few services you can sign up for that will report your rent activity, usually for a small fee, though they may not partner with all three of the major credit reporting bureaus. Your landlord also has to agree to participate. Rental Kharma, for example, costs $25 to set up and then $6.95 per month. It also allows you to have 24 months’ worth of payments retroactively reported to Transunion for an extra $60 fee. Rent Reporters requires an enrollment fee of $94.95 and then a monthly fee of $9.95. Enrollment includes up to two years of back payments, which are reported to TransUnion and Equifax.
2. Get added as an authorized user.
One of the easiest ways to establish credit without having to put yourself into any type of debt is to get added as an authorized user to a long-standing, high-limit card of a family member or close friend, said Michael Foguth, founder of Foguth Financial Group in Brighton, Michigan.
Authorized users basically piggyback on the credit history of the primary account holder. The card is reported on the authorized user’s credit reports, and they’re allowed to make purchases with the card. However, authorized users have no legal responsibility to pay the balance. “This tactic can help build your credit from scratch or improve your already established bad credit,” Foguth said. “It can also boost your available credit and length of credit history, which are two contributing factors to your credit score.”
Keep in mind that as an authorized user, you don’t actually need to have access to the card or use it in order for it to show up on your reports. As long as the primary cardholder uses the card and pays the bill on time, your score should benefit. On the other hand, if they max out the card and miss payments, your score will suffer ― so choose whom you work with wisely.
Also keep in mind that being added as an authorized user won’t necessarily have a huge impact on your score. The credit bureaus give less weight to authorized user status since you’re not actually the one responsible for paying back the debt. Still, this strategy can bump up your score, especially if you have a thin credit file.
3. Take out a credit-builder loan.
Don’t let the word “loan” give you pause. Credit-builder loans are designed for people with no credit or bad credit, and don’t work like a typical loan. “It is like a forced savings account,” Lane said.
Here’s how it works: You “borrow” a small sum of money, usually between $300 and $1,000. Those funds are secured by the bank in a deposit account such as a CD. You then make payments toward the loan in regular installments over the course of about a year. When the loan is repaid, the funds in the account are released to you, plus any interest that might have accrued.
Keep in mind, however, that these loans aren’t free. Usually, the lender will charge you an administrative fee and/or interest, so it’s important to compare costs before taking out a credit-builder loan. (Credit unions are a great place to look.) Often, the fees are worth paying in order to establish good credit or help repair a poor credit score.
4. “Boost” your score with utility payments.
This free tool was designed to help people with thin files beef up their credit by showing responsible behavior in areas that aren’t typically reported to the credit bureaus. By signing up for Experian Boost, you can get credit for paying phone and utility bills on time.
“You can sign up through the credit agency and choose which of your bills you’d like reported,” Huntley said. By giving Experian access to your bank accounts, the agency will comb through your transactions to find the payments that qualify. “Experian claims that their boost, on average, increases the user’s credit score 13 points.”
There are a few limitations to this service, however. For one, it only improves your Experian FICO score ― Equifax and TransUnion will not receive updated payment information. It also only applies to the FICO 8 scoring model, so you won’t see an improved score in other versions. And you have to pay your bills via your bank accounts; credit card transactions don’t count.
The good news is that it’s completely free and doesn’t require you to open any new accounts. Plus, Experian ignores derogatory payment history and only pulls in the positive, so you don’t have to worry about getting dinged for past mishaps. Simply pay your bills on time and your Experian score should get a boost (though there’s no guarantee it will).
5. Check your credit reports for errors.
Did you know your credit report could have at least one error on it? And if it does, there’s a chance that error is causing your credit score to be lower than it should be.
In 2012, the Federal Trade Commission did a study of credit report errors and found that about 1 in 5 consumers has a “confirmed material error” in at least one of their credit reports from the three major bureaus. A confirmed material error was defined as a mistake that, when corrected, would change their credit reports. And among that sample of people with credit report errors, about 5% had a mistake serious enough to result in a lower credit score that would cause them to pay higher interest rates on their debt.
That means if you have an error, finding it and disputing it with the credit bureau could result in an immediate lift to your score. To review your credit reports for errors, you can visit annualcreditreport.com, which is the only website that’s federally authorized to provide credit reports from all three bureaus at no cost. You’re allowed to request a free copy of your report once per year.
Comb over your reports for common mistakes such as the wrong name, missing accounts, duplicate accounts and accounts marked as past due that are actually in good standing. If you do find an error, you can dispute it online with the appropriate bureau:
Once you dispute an entry in your credit report, the credit bureau must investigate it within about 30 days unless they deem the claim frivolous. Once they’re done investigating, they must provide you a summary of the results in writing. And if you get a major error fixed, you should see an improvement in your credit score soon after.
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