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Unless you have a ton of cash at your disposal, you’ll probably need credit at some point in your life. Whether you’re buying a home, car or big-ticket luxury item, the first thing that most lenders typically look at are your credit scores.
If you have limited or no credit history, you’ll need to begin building your credit and boost your scores before you apply for a major loan. Unfortunately, many believe that opening and using a credit card is the only way to go.
Here are a few alternatives to help raise your credit scores without the magic plastic:
1. Ask companies to report on your behalf
Do you have any recurring bills that you pay on a monthly basis, such as rent, utilities, cable or a cellphone? Try giving the providers a call and requesting that they report your account activity to the three major credit bureaus — TransUnion, Experian and Equifax.
But do this only if you have responsible payment habits, as payment history accounts for 35 percent of your credit scores and can have a significant impact if there is not a lot of other data in your credit reports.
Also, bear in mind that these companies are not obligated to report to the bureaus, and your request is simply a favor that they have the right to deny.
2. Become an authorized user on another credit card
Of course, there are pros and cons to becoming an authorized user. If the cardholder has a strong credit background, two thumbs up for you because signing on as an authorized user will enable their stellar behavior to improve your credit profile somewhat (perhaps not as much as you think). But, if things are the other way around, your credit scores could take a hit.
Either way, if you opt in and have a change of heart, the information will quickly vanish from your credit file when you request to be removed from the account.
3. Open an account with a credit union and take out a small personal loan
Some credit unions have restricted membership and limited accessibility, but credit unions generally offer financing options at lower interest rates than traditional banks. To give your credit score a boost, apply for a small personal loan.
If your request is denied, inquire about a secured loan in which your money — say, a certificate of deposit or savings account — will be used as collateral. The request will more than likely be approved because the risk to the institution is minimal. And you may have to pay a tad bit of interest, but the rate usually beats what’s available in the credit card world.
4. Apply for an installment loan
Installment loans paid in a timely manner over an extended period of time build your credit scores because they show creditors that you are a responsible borrower. The types of credit in your file make up only 10 percent of your score, but the impact has the potential to be even greater if the information in your credit reports is limited.
Retailers sometimes offer promotional installment loans to customers with little to no introductory interest for a limited period of time. If you have the cash on hand, it may not be a bad idea to take this route. But be sure that you have the total sum of cash available upfront to make timely payments and eliminate the balance before the interest kicks in.
5. If you’re a student, take out a federal student loan
A credit check is not required to obtain a federal student loan. All you need to do is fill out the Free Application for Federal Student Aid (FAFSA) and you’re all set. Since it is an installment loan, it can help boost your credit score.
But don’t get the loan and blow through the money. Instead, aim for one that is subsidized and deposit the money into a safe interest-bearing account so the funds will be available when repayment starts.
6. Research peer-to-peer loans
Companies like Prosper and Lending Club offer peer-to-peer loans in an environment where borrowers are connected with individual investors. The interest rates are usually lower than those of traditional financial institutions. And the lenders are eager to loan unsecured funds because the return they derive is competitive with other investments. (See “4 Things to Know About Peer Lending.”)
Most of the peer-to-peer lenders report to the major credit bureaus.
7. Try an alternative credit score
By reporting your payment history to an alternative to the big three credit bureaus, you can create a nontraditional credit score. Check out a service like Payment Reporting Builds Credit, known as PRBC, to learn more about how an alternative credit score service works.
Do you know of any other ways to improve your credit score without using a credit card? Feel free to share in the comments below or on our Facebook page.