Eventually, the need for credit is inevitable for most of us. When the time comes to buy a car or a home, to rent an apartment, to set up new utility accounts, to obtain a cell phone, or perform one of many other everyday financial transactions, a healthy credit file is the tool with which we can avoid expensive terms, or worse, application rejection.
Luckily, only a small portion of your credit score is based on having and using revolving credit products (credit cards). Your FICO score is based on the following:
- Payment history (35%)
- Amount owed (30%)
- Account age (15%)
- New accounts / inquiries (10%)
- Credit mix (10%)
The VantageScore, another consumer credit rating system, uses similar criteria, in a slightly different formula developed by three credit reporting agencies (Equifax, TransUnion and Experian).
Clearly, the most important factors are establishing a history of on-time payments to all creditors and keeping debt low in relation to the amount of credit available to you (known as the credit utilization ratio). Consumers who cant – or dont want to – obtain a credit card can build credit in other ways.
Building Credit Without Credit Cards
You can take several steps toward a healthy credit file without the use of credit cards.
1. Keep paying old bills
That old student loan may feel like an albatross around the neck, but years of on-time payments and the age of the account will boost your score. An account in good standing factors into your score until ten years after it’s paid off and closed, so don’t miss payments or pay late.
Pay off collection accounts, too, since the newest version of the FICO score ignores paid collections (but seriously dings your score for unpaid collections).
2. Report your rent
For consumers with subprime or unscoreable credit, reporting rental payments is a very smart move. An Experian study found that for consumers with “thin” credit files (not enough data upon which to base a score), adding rental history made them scoreable. Many jumped straight to the prime credit category. Furthermore, consumers who already had credit scores saw their scores rise by an average of 29 points. (See Use Paying Rent To Boost Your Credit Score.)
Here’s why. A large portion of the consumer credit score is based on payment history and account age. Consumers who regularly make on-time mortgage payments score both types of points. But in this context, consumers who rent responsibly have historically been at a disadvantage. While evictions and collections can do plenty of damage, until recently a responsible rental history provided little or no credit benefit.