No one wants to be refused the chance of getting excellent apartment options, the best mortgage rates, or good rates on student and car loans. Being an adult comes with many responsibilities and building a good credit score is one of them.
So how do credit scores work? Your credit score is a number that indicates how likely you are to repay debt. It’s used by banks and other lenders when they’re deciding whether to give you a loan or credit card. With the help of a credit score, someone’s credit history is determined. With a good credit score, one can more easily obtain a loan, rent an apartment and similar things.
A good credit score can be achieved by using a credit card responsibly, but not everyone has a credit card. There is a bit of a catch between having a credit card and having a good score- you cannot have a credit card without a good credit score and vice versa.
What can you do if you don’t have a credit card and don’t want to get one? Some people balk at the high interest rates of such cards or are afraid they won’t be self-controlled with their spending. It is possible to build a good credit rating without one. In this article, we’ll take you step by step through the process and look at a few things:
- How does a credit score work?
- How can you review your credit report?
- Seven proven ways of building good credit without a credit card
- Monitoring the progress of building a good credit score
- Some more tips for achieving a good rating
Remember one hard truth: Damaging your credit score is far easier than building a good one. You must be extra cautious in every aspect.
Let’s not waste any more time but rather get into the details.
1. How does a credit score work?
In order to know how a credit score works, you first need to know which things are looked at when determining your credit score. Once you know this, it will be easier for you to build a good credit rating.
While evaluating the credit applications, 90% of lenders trust in the FICO score (developed by the Fair Isaac Corporation), which is a credit score model. FICO’s scoring technique does not require any guessing, because everything is determined according to set criteria. Let’s examine those criteria in detail.
- 35% depends on payment history: If you do not want to damage your credit rating, you need to make every payment on time. If you have not made payment within 30 days, this will have a negative impact on your credit score. Try not to be a credit killer by leaving payments overdue for too long.
- 30% depends on the debt money that you owe: This factor is important but also a little complicated. It looks at exactly how much credit you are using from your total available credit balance. Lenders tend to believe that borrowers who max out their credit lines are the ones who miss payments intentionally. Suppose you have a credit line of 1000$, the credit score will be good if you only use 300$ or less of it. Keeping it down will not only improve your chances of building a good credit rating but also will keep you away from high interest and debt.
- 15% depends on the length of history: This criterion basically looks at how long you have been using your accounts for and if you’ve been managing the credits wisely.
- 10% depends on any new credit: Lenders will check if you have opened too many new accounts. This is to determine if you are desperate to get loans or not. If they sense any desperation, the credit score will go down.
- The remaining 10% depends on various type of credits you use: Lenders will see if you are using other credit lines such as student loans, car loans, and personal loans. Your credit score will depend on whether you are managing such loans carefully and responsibly.
2. How to review your credit report?
Now that you know what goes into building a credit report, you will want to know the status of your current credit report. You can get your credit report in many ways. You can seek help from the credit monitoring services, or if you want to see just the reports with no score then you can simply download them for free.
These credit monitoring tools are different from FICO because they use a vantage score model which is created by Experian, Equifax, and TransUnion– the three major credit bureaus of the US. There is another popular credit monitoring tool, known as Creditkarma, which uses two of the three bureaus to determine a credit score.
You might notice that you get a different credit score from different tools. This isn’t a problem because every monitoring tool uses most of the same factors and the general credit scores’ range is 300-850. Most of the sites have confirmed that the Creditkarma score stays within 1% of the FICO score. So, if you can manage to get your Creditkarma credit score, then you can try to guess your FICO score, but if you want to have the exact figure, then you will need to pay for it.
A vital thing remember is that the credit bureaus don’t think that it’s their duty to correct any mistakes on your credit report. You must be proactive by checking if there are any and fixing them accordingly. If you are a newbie and just starting with credit, then you won’t need to correct anything. However, if you’ve been using credit for some time, you’ll need to make sure your credit report is error free.
There are a few steps you can take to repair a bad credit score:
- You need to retrieve your credit reports by using various credit monitoring tools.
- Review all those reports and look for any mistakes.
- Log the mistakes with the credit bureau which issued the report.
- Wait for 30 days. The bureau should verify the details and correct the errors.
- Once the bureau has verified everything, they will remove the error and will provide you with a new report.
3. Seven proven ways of building good credit without a credit card
Now that we have a foundation, we can proceed with the ways of building credit without a credit card.
Be an authorized user:
It is possible to be added as an authorized user of a credit card if someone in your family or among your friends are willing to let you do that. You can have the same benefits as the primary cardholder. Even if you are not using that credit card, the card activities will be noted and this will help you to boost your credit score.
This process is easy, but it does contain some risk. If the primary cardholder is hampering his/her credit score by delaying bill payments, then your credit score will be affected too. Please be aware that the credit card company logs the activity of the authorized users as well, so if these users aren’t reliable then being an authorized user of their credit card won’t help you building a good credit rating.
Credit builder loan:
This is a simple process designed to help people who need to build credit. Sometimes the banks or credit unions allow borrowers to take a credit builders’ loan. The borrowing amount is usually not high. In this case, you will be given some time to pay off your loan (including the interest) and then you can get a hold of the loan amount. The loan amount needs to be saved in a savings account or as a CD.
The on-time payment process of the loan along with interest will boost your credit score. Credit builder loans do not have high interest rates and are easily accessible to people with non-existent or bad credit.
Paying off a student loan:
A federal student loan can be granted as long as you are being educated in any eligible institution even if it is a part-time course. You don’t need to pay for it until you have graduated or have completed the course, but if you are thinking about building credit at the age of eighteen, then you can start paying off your student loan. Keep in mind that you have to develop your career too, so you need to choose what you study carefully. Remember that you cannot just take a student loan to build credit, you do need to complete a course.
Mortgage loan:
If you are a student or have just graduated, you are probably not yet ready to be a homeowner, but if you do happen to have a mortgage loan, then it will be an advantage and will increase your credit score. When you take out a mortgage loan, it will negatively affect your credit, but with on-time monthly payments it will rise up again.
Mortgage loans are quickly approved if you have made rent payments on time and have paid your bills on time for at least one year.
If you are not eligible for a mortgage loan, then you can get the help of someone with a good credit score. They can be your co-signer. This can potentially cause problems though if you are not able to pay off the loan because then the co-signer will be liable to pay. If he fails to do this then his credit score will be ruined too.
Car loan/auto loan:
Similar to a mortgage loan, a car loan will also help you to secure a good credit score. Just make sure you pay off the loan on time. If you think that you might forget about the date when payment is due then choose the auto-debit option for repayments. This will prevent headaches later. Having an auto-debit or auto-pay option is a significant thing for lenders to see that you are responsible and pay regularly.
Pay housing rent on time:
If you pay your rent late you run the risk of your landlord reporting you to the credit bureau. Make your payments on time then ask your landlord to report your monthly payment through Experian Rentbureau. Ask your utility providers to report your on-time utility bills too.
Secured/student/store credit card:
If you are starting fresh, then you can apply for a secured or student credit card. These are not typical credit cards, but they do have some use while you are trying to earn a good credit score. These are entry-level credit cards and won’t require a long history to be approved.
- Secured credit card: To get a hold of a secured credit card you need to have a back-up amount in an account from which the payment will be deducted if you miss any payments. Choose a card which won’t be charging you any annual fees, and obviously do your homework before getting one. If the company does not report your card activity to the three bureaus, you won’t have any use for that card.
- Student credit card: A student credit card is given only to build credit. You will have some bonus offers along with it. The one drawbacks are that the credit limit is nominal, and the interest rate is higher.
- Store credit card: these are not only for consumers but also for those who want to show the bureaus that they are responsible for handling money. Similar to student credit cards, these cards also come with high interest rates, though they will have a nominal credit limit. Make sure you do not purchase too many things at a time, and make sure to pay on time.
4. Monitor the progress of building a good credit score
Can someone continue with the process of building a credit history? Yes, they can. If you think that you want to improve more, you can do it. Suppose you have taken a personal loan for home renovations. After 5-6 months, you think of getting a peer-to-peer loan or an auto loan. If you think that you can manage your budget, then you can go on taking an installment loan. Paying these on time will give you a better credit score. Please make sure that you don’t take too many loans at once, otherwise, it will create a trap that you’ll find very difficult to get out of. You definitely don’t want to struggle with your cash flow while making payments for the loans. Do everything gradually, and then you’ll begin to see progress.
5. Some more tips for achieving a good rating
Since you are thinking of building a good credit rating, there are certain things that you need to maintain in order to achieve your goal.
- First and most important is sticking to your budget. It is possible that you are paying for everything with cash since you are not yet a credit card holder. It’s important to have a budget and to keep all your spending according to that budget. Please don’t think you can memorize your budget! It’s important to keep track of all your spending, either by writing it down or by using a budget app. This helps you see just how much money you are spending on unnecessary things. Sticking to your budget is one of the best things you can do if you are really dedicated to building a good credit score.
- If you can continue maintaining good credit, then you will be eligible for some credit cards. It’s your choice if you want to possess the cards or not. Having a credit card and using it wisely will obviously boost your credit score.
- If you use a credit card, do not grab every offer it can bring you.
- Try to pay off the total payment due in one shot to avoid paying high interest.
- If you cannot pay the whole amount, try to pay most of it.
- Find out what goes into your credit report. Paying cable TV, internet, or the phone bill won’t be a factor in your FICO score. However, it’s still important to pay them because these type of utility bills are public affairs and not paying these will have an effect on your credit score.
Another thing is that while maintaining your savings account, or 401(k) account don’t have an influence on your credit score, saving is still really important to provide security for you in life. It’s therefore vital to continue with your savings and investments.
Achieving a high FICO score is just a mathematical calculation, and now you know how to get it. Follow these steps, and you will reap the benefits of a good credit rating. You will be able to easily get the best mortgage interest rates, credit card facilities, insurance facilities and so on. Remember though, a bad credit score will bring a great deal of trouble. You can end up being in tens of thousands of dollars in debt due to bad credit. If you are diligent in following our advice though, then you don’t need to worry. You’ll begin to benefit quickly from the advantages of a great credit rating.