A good credit score is an important part of your financial arsenal. A good score will allow you to borrow funds for major purchases like student loans, a car loan, or a home loan. It can impact your interest rates meaning you’ll spend less over time and in turn that can have a huge impact on your savings.
Additionally, a good credit score can also impact your employment opportunities. If your experience is similar to another candidate and you are neck in neck the difference may come down to your financial history.
I’ve written about the basics of credit scores and credit reports, so if you need an intro start there. FICO is used to calculate credit scores and these are reported by the three major credit reporting agencies. Their calculations are based on a number of factors, but most often it’s based off of loan repayments and credit card history. Now FICO is aiming to help create scores for the over 50 million consumers who don’t have credit scores or have what are known as ‘thin’ reports-meaning a lack of loans and credit cards according to the Wall Street Journal. Often these consumers have experienced a bankruptcy or other financial issue that has kept them from having loans and credit cards for many years.
While the traditional advice to improving your credit score (or having one) is to get a credit card, spend, and pay it off each month this process is not a quick way to build credit. It’s also an ineffective strategy if you have a low or no income or have experienced a financial catastrophe. (Most often this related to medical bills.)
About New FICO Scoring
New FICO scores are in a testing phase according to the Wall Street Journal piece. It’s likely they will be used widely in coming years to help those without an extensive credit history earn a credit history and score via less traditional methods. So while it may not be released into the wilds of the consumer market yet, you can start now with these steps to help you build your credit score without credit cards, loans, or mortgages.
Why do you want a credit score?
For many people they want to maintain no debt. No loans. No credit cards. It means no debt. This is a smart strategy especially if you have a low or limited income. However, it also means if you decide to take a loan or need to use credit for education, building a business, or buying a home in the future you may have trouble getting approved or have a higher interest rate. Building a credit report and having a good to excellent credit score makes it easier for your to borrow should you have to in the future.
How To Build Credit Without Credit Cards
While not all the data points used in the score are being released at this time there are some key things we do know which means you can start now.
Payment History Is Key: Pay Your Bills On Time
This should go without saying, but you should always pay your bills on time. We’re all guilty of the occasional slip-up with due dates or we may have a tough time paying a bill due to unexpected expenses and a tight budget. Making an effort to cut back your expenses or earn more so you can pay your bills on time is key. Paying on time ensures when the new scores are released you’ll be in good shape.
Tip: Use our monthly budget worksheet to ensure you pay everything on time each month.
Focus On Utilities
The 50 million consumers who don’t have credit scores don’t have credit cards or loans that traditional FICO scores are based off of. This means that FICO had to find other indicators that show a consumer’s financial history. Utilities will be a big factor. This includes:
- Cable, Internet, & Home Phone Bundles
- Cellphone Bills
- Electric & Gas Bills
Since you’re thinking about these bills it’s also a great time to consider what you’re paying for these bills each month and find ways to reduce your cellphone bill, utilities, or consider cutting the cable.
Tip: Set up automated payments for your monthly utility bills so you’re never late.
Maintain Your Home Address
Another factor that will be considered in the new scores is how often you move. Frequent address changes can be an indication of financial instability according to the Wall Street Journal piece. The new score will factor that into your credit score, so it should be a motivator to stay put. While there’s no indication yet as to how often ‘too often’ is, my assumption is that moving more than every few years could decrease your score when factored in with other factors. So, whenever possible maintain your home address at the same location.
Tip: For students and young people you may consider your parent’s home address as your main address until you’ve graduated or settled into a location.
Make Sure Your Name is On Utility Bills
When you live with another person or other people whether it is a partner, spouse, or roommates it is key to have your name on all the monthly bills. This will allow you to pay the bills in a timely fashion should your living situation change, and it will help you build your credit score when the new credit scores roll out.
According to the WSJ.com piece there will be ‘other factors’ that impact the new credit score as well. Stay tuned for details on what those other factors will be. As I learn more I’ll update this piece to reflect what those factors will be. In the meantime the above advice should help you get a jumpstart on improving your future credit score.