No Credit Card? Here Are 6 Ways You Can Still Fix Your Credit Score
August 2, 2018 | By OppLoans
Strategies include becoming an authorized user on someone else’s account, getting a cosigner, paying down your outstanding debts and more!
Traditional credit cards are a great way to rack up debt, but they are also perhaps the number one way to improve your credit score. By keeping your balances below 30 percent, making all your payments on time, and paying off every purchase within the 30-day interest-free grace period, your credit card can double as a ticket to the financial promised land.
There’s only one little catch. People with bad credit cannot usually get approved for a regular credit card. It can feel like a Catch-22: You need a credit card in order to improve your credit, but you need good credit in order to get a credit card! In the meantime, you’re stuck with high-interest cash advance loans that drain your bank account and don’t even do anything to improve your credit!
Here’s the good news: There are lots of other ways to improve your credit. That’s why Katie Ross, Education and Development Manager for the national financial education nonprofit American Consumer Credit Counseling (@TalkCentsBlog), offered us six great strategies for improving your credit without a traditional credit card.
1. Become an authorized user on someone else’s account.
“If possible,” said Ross, “become an authorized user on someone’s account—whether it’s a parent, spouse, sibling, or another family member or close friend. Note that you will be authorized to use this person’s credit card with your name. Becoming an authorized user can help (re)build credit in your name. Make sure that you act responsibly! Your misuse of this person’s card can cause financial ramifications on their end.”
Ross is dead on. Misusing another person’s credit card account is a perfect way to tank their credit, as well as your relationship. But the great thing about becoming an authorized user is that you don’t need to use the account in order to help your credit. So long as the credit card company reports information for authorized users (instead of just primary account holders), positive activity on the account will benefit your credit.
When it comes to being an authorized user, trust also goes both ways. Just as positive activity on the account will benefit your credit, negative activity on the account will hurt it. Make sure that the person you ask is someone who’s good with money and uses their credit responsibly. Borrowing money from friends and family comes with its own set of risks, and linking your credit histories together via a shared account is no different.
2. Get someone with better credit to be your cosigner.
“Similar to becoming an authorized user,” Ross offered, “if you are looking to obtain a line of credit but do not qualify on your own, consider a cosigner with good credit to help you obtain the loan. Note that if you fail to make payments, the cosigner is legally responsible for the loan.”
While becoming an authorized user on an account is a two-way street in regards to trust, asking someone to be your cosigner is more of a one-way arrangement. You are asking the cosigner to put their own credit history on the line in order to help you secure a personal loan or line of credit. But they’re not the one who’s going to be making the payments on the loan—that’s all on you.
Falling behind on payments or defaulting on that loan will reward their trust in you with a big ol’ dent in their credit score. Really, “dent” is not the right word to describe what will happen to their score, any more than saying someone “dented” your car when in fact they “t-boned you and caved in the passenger-side door.”
Being on the hook for a loan that someone else took out is the reason that many people are extremely cautious about cosigning. And they are right to be wary. Getting a cosigner can be a fantastic way to help build your credit—it means being able to borrow larger amounts of money at more affordable rates—but screwing it up is an equally fantastic way to torpedo your close relationships.
3. Take out a small loan.
“Take out a small credit-building loan from a bank” Ross advised. “Local institutions are often more likely to extend credit to those with little to no credit history. Acquire a small loan for an item that you already have money available for in another account. This way, you are sure to repay the loan in a timely manner and thus get good marks on your credit.”
Ross is right that local institutions are much better suited to these types of transactions then big multinationals. And while local banks are great, local credit unions could be even better for your borrowing needs. These are nonprofit institutions that seek to serve specific communities with better products and services than for-profit banks.
One thing that needs to be noted: The kinds of small loans you should be getting to help build your credit are vastly different from small-dollar no credit check loans like payday loans, and title loans. Even if that payday loan storefront down the street is a “local business,” it’s not one that’s going to be helping you out in this regard.
First of all, These loans come with extraordinarily high APRs—an average of almost 400 percent for payday loans and 300 percent for title loans—that can push borrowers into a dangerous cycle of debt. Second of all, most of these lenders don’t even report information to the credit bureaus. So even if you were to pay your loan off on time, you wouldn’t get any “credit” for it.
4. Get a store credit card.
“If you are unable to qualify for a regular, unsecured credit card, consider taking out a store credit card with a small limit and low APR,” said Ross. “Look into stores that you frequent and can make small, routine purchases that you can immediately repay to help build your credit. Having a card that you don’t use will not help rebuild your credit, but rather, responsibly using that credit can make a difference. Only charge what you can afford to pay in full each billing cycle.”
The great thing about store credit cards is that they are easier to get than regular credit cards. Stores have different incentives than traditional lenders, which means that their cut-off point for credit scores is going to be much lower. Simply put, someone with a lousy credit score stands a much better chance of being approved for a store card than for a regular one.
The trick with using a store credit card to rebuild your credit is the same trick as using any credit card to rebuild your credit: Do not put more money on the card than you actually have in your bank account. Racking up credit card balances well beyond what they can afford to pay off month-to-month is how many people end up with bad credit in the first place.
As Ross mentions, you have to use a credit card in order to improve your credit score, so keeping your purchases small and manageable is the way to go. Store cards come with an average APR that is roughly 50 percent higher than regular cards, so be very deliberate when shopping around and aim for the best rate you can. Then again, if you are paying the balance off in full every month, interest rates shouldn’t be a huge worry.
5. Take out a secured credit card.
According to Ross, “A great option for those with poor credit are secured cards, Secured cards work similarly to regular credit cards, except they typically require a cash or collateral security deposit to ensure payment of the debt. The borrower will offer cash or collateral to the equivalent of whatever the loan amount is. Then, you will receive a secured card with that same limit. To get your security deposit back, you must repay the amount you’ve spent on the card. The larger the security deposit, the higher the limit granted.”
A secured credit card is even easier to get than a store card, and that’s because the lender assumes very little risk. By using the borrower’s cash collateral to set the credit limit, the lender basically ensures that the principal balance on the card is going to be repaid. Sure, they might miss out on some interest, but they won’t actually be losing money.
This is great news for people with bad credit. By building up a cash reserve and then using it to take out a secured card, you can set yourself on the path to an improved payment history and a higher score. Sure, saving up money isn’t the easiest thing when you don’t have a lot of income, but even several hundred dollars towards a secured credit card could be a huge boon to your financial wellbeing.
The general advice with using a secured credit card is pretty much the same as the advice for using the store credit cards—or any credit card at all. Do not use the card to live beyond your means, only take out what you can immediately pay off, and make all your payments on time. Secured credit cards can often have some pretty hefty fees attached for various services, so make sure you know those ahead of time and do your best to avoid them.
6. Focus on loan repayment and paying down your debt.
“Loan repayment is considered on your credit report. Whether you have an auto loan, federal student loans, or other types of loans, repaying your lenders on-time and in full each month will help to (re)build your credit,” said Ross.
After your history of on-time payments, your amounts owed is the second most important factor in your score, making up 30 percent of the total. So if you have a lousy credit score, there is a fairly good chance that it’s because you have taken on large amounts of debt. That could include credit cards, but it could also mean, as Ross mentioned, stuff like auto loans and federal student loans.
And while nobody is exactly thrilled to be making payments on their car or student loans every month, those outstanding loans do provide you with a golden opportunity to work on your credit score. Every on-time payment that you make not only adds to your payment history, but it reduces that amounts that you owe. Even the right bad credit loan—one that reports payment information to the credit bureaus—can help improve your credit if you make your payments on time every month.
Lastly, if you have large amounts of outstanding consumer debt, and you want to improve your score, paying more than your monthly minimum amounts is the way to go. Our advice: Create a debt repayment plan that allows you to focus on one debt a time like the Debt Snowball or the Debt Avalanche. And once you’ve made that plan, all you need to do is stick to it.
Improving your credit score without a traditional credit card isn’t the easiest thing in the world, but it is most certainly doable. Whether it takes help from a family member, a secured credit card, or just a solid debt repayment plan, you have the power to take your score from zero to hero.