How to Increase Your Credit Score Without Increasing Your Credit Card Debt

How to Increase Your Credit Score Without Increasing Your Credit Card Debt

Written by Bryan Daly
Fact-checked by Caitlin Wood
Last Updated July 30, 2018

Credit cards are often the first credit building products that borrowers interact with. In fact, it’s common for Canadians to have at least 2 active credit card accounts listed in their credit report. When managed responsibly, a credit card can be a simple and effective tool for creating a solid credit history and raising your credit score. The better your credit score is, the better your chances will be of receiving approval and favorable interest rates for your future credit products. Then again, when handled irresponsibly, your credit card bills can get out of hand, leading to a pile of unmanageable debt. Since bad debt leads to bad credit, it’s always best to find a way of avoiding it.

Therefore, you might be wondering if there’s a way of increasing your credit score without using your credit cards. For that matter, can it be done if you don’t have any credit cards at all? Most people will tell you that having at least one credit card is essential, especially if you want to apply for more expensive credit products down the line, such as a car loan or a mortgage. If you’d like to know more, keep reading.

Read this to learn how the money you owe affects your credit score.

How to Build Your Credit Score

Every credit user has to start somewhere. If you’ve never used any kind of credit product, it means you don’t have a credit report, credit rating, or credit history. These elements are necessary if you want to become a regular credit user and build a solid credit score. Once you have these elements and you’ve spent some time increasing your creditworthiness (meaning you’ve been paying off all your credit accounts properly), you’ll eventually come into the position where you’ll qualify for more expensive credit products.

Where to Start?

Generally, the process goes something like this. You, like most borrowers, would apply for your first credit card shortly after you turn 18. As soon as you activate your credit card (or other product), your card company (or lender) will inform one or both of Canada’s two major credit reporting agencies, Equifax and/or TransUnion. Those agencies will then start compiling a credit report in your name, which is a record of all your credit-related activity over a predetermined number of years. You’ll also be given a three-digit credit score ranging from 300-900, which works as a cumulative average that lenders examine when considering you for approval. The higher your credit score is, the more creditworthy you’ll be in their eyes. According to TransUnion, a score of 650 or will give you the best chances of being approved.

For more information about your Canadian credit score, take a look at this.  

Everything Counts

From then on, your credit-related transactions affect your credit score in various ways. All your credit accounts get a credit rating, which also impacts your score. The more positive activity that gets recorded, the better your credit rating will be and the higher your credit score will grow. On the other hand, whenever you default, meaning you didn’t honor your agreement in some way (missed payments, etc.), the lower your credit rating and credit score will fall. It’s very important to take care of your credit because healthier credit means higher chances of approval. When lenders pull your credit report during the approval process and see that your credit is healthy, they’ll determine that you’re a less risky borrower and offer you a lower interest rate. That lower rate can save you hundreds, maybe even thousands of dollars on your future credit products.

Click here to learn the minimum credit score for mortgage approval in 2018.

The Problem With Credit Card Debt

You might be reading this article because you don’t actually have any credit cards yet or don’t want any. Or, maybe you already have a credit card, but you just don’t want to use it because of the bad debt it can cause. Whatever you’re reasoning is, wanting to avoid credit card debt is completely rational. After all, why rack up debt if you don’t need to?

While these cards can be an easy way of raising your credit score, like any credit product, they can cause massive financial turmoil when they’re not handled responsibly. Credit users sometimes have a hard time balancing their spending and payment habits. Excited by the idea of not having to spend money right away, they go charging all their expenses to their credit cards. A month later, they get slapped with a huge bill they can’t afford. Afterward, they might only be able to keep up with the card’s minimum monthly payments, which leads to heightened interest rates and even more debt. Things only get even worse when they stop making payments altogether.

Want to know what happens if you stop paying your credit card bill? Read this.

For all those reasons, it’s totally acceptable if you’re not comfortable using a credit card as your main credit-building tool. If you still want to create and improve your credit score, don’t worry, there are a few ways you can do so without one.

Applying for a Small Installment Loan      

The first tactic you can use to build a cardless credit score is to apply for an “installment loan” through your bank, credit union, or other nontraditional lender. If approved, you’ll be given a certain amount of loan money, which you’ll need to pay back by a specific date. The loan will be installment-based, meaning it’s divided into equal payments, making it easier to afford. You’ll then pay back the loan over an agreed upon time frame, usually a couple of years, depending on its size. Once it’s paid in full, the payment schedule ends and you’re free to walk away or apply for another loan.

Applying for a Guarantor Loan

Guarantor loans can be very helpful you have bad credit or you think your lender might deny your application for some other reason. This is because, during the application process for these loans, your credit will often not be checked. Instead, you’ll need to recruit a co-signer, who will go through a credit check in your place. By becoming your guarantor, they’ll be agreeing to take on your loan payments in the event that you default (miss payments or don’t follow your loan agreement somehow). If you’re approved, however, you should be able to secure a loan with an affordable interest rate. During that time, any good payments you make should show up in your credit history and have a positive effect on your credit score.

Want to know how you can get a guarantor loan in Canada? Find out here

Just be aware that since your guarantor will be secondarily responsible for your loan payments, you’ll be putting them in debt if you default for too long. If this occurs and they also are unable to afford the payments, both of your credit and financial profiles will be damaged.

Read this if you’re not sure about whether a guarantor loan is right for you. 

Using Your Other Regular Bills

Remember, debt doesn’t just come from credit cards. Most people have a slew of other bills that they need to keep up with, such as their monthly internet/digital cable package, their cell phone plan, their utilities and/or rent.

Generally speaking, the providers of such services don’t report these kinds of payment activity to Equifax or TransUnion. However, you can request that they do. If you’ve already been a responsible bill payer, those organizations or individuals might just speak up on your behalf.

Ask Someone to Add Your Name to Their Credit Card Account

If you don’t want to apply for your own credit card, you can also become an “authorized user” on someone else’s account. Your name can be added to the primary cardholder’s account via online banking, by request at the bank, or by phone directly through the credit card company. Afterward, you can either use their credit card or you can be issued one of your own. The primary cardholder is then responsible for paying the total monthly balance, while you yourself can pay your portion of the bill however you’ve agreed upon.

Trying to consolidate your credit card debt? Check this out.

While becoming an authorized user can be beneficial, it’s important to understand the potential consequences of choosing this route. Whether the primary cardholder is your best friend, family member or significant other, realize that both your credit accounts will be linked. This means that every good or bad transaction you make will affect the primary cardholder’s account, and vice versa. This can be a positive thing if you’re both being responsible with your credit transactions. However, it can be a major drawback if you’re not. For instance, if you don’t pay your bills properly, not only will your partner be responsible for your debt, but both of your credit scores will be damaged. The same effect will occur if your partner is the one who isn’t paying their bills. Always consider these potential drawbacks before choosing this option.

Disputing Errors in Your Credit Report

This option only applies to those who already have an established credit report, but it is technically a way of increasing your credit score without actually using a credit card. As we said, a credit report is a record of all your credit accounts and credit transactions. Every transaction that you make, good or bad, gets recorded and remains in your report for a specified number of years, affecting your credit score in various ways. That’s why it’s good to review your credit report for errors at least once per year.

Want to know how long credit information stays on your credit report? Find out here.

Credit report errors caused by wrong or misspelled personal information, fraud or identity theft, can seriously damage your credit score, especially if they go unnoticed and uncorrected for months, even years on end. So, if you do review your credit report and discover an error of any kind, you can contact both credit bureaus and dispute it.

Click here to learn how to dispute an item in your credit report.

Get a Second Opinion

It can be tough to increase your credit score without the help of a credit card. However, there are several ways of doing so, as long as you fully understand how both your credit and your finances could be affected during the process. For that reason, it’s always best to get a second opinion from a professional financial advisor before you make your decision. Once you’ve got a good credit score on your side, you’ll be that much closer to achieving your financial dreams.

Rating of 4/5 based on 3 votes.

Bryan is a graduate of Dawson College and Concordia University. He has been writing for Loans Canada for five years, covering all things related to personal finance, and aims to pursue the craft of professional writing for many years to come. In his spare time, he maintains a passion for editing, writing screenplays, staying fit, and traveling the world in search of the coolest sights our planet has to offer. Bryan uses the BMO Cash Back Mastercard to earn cash back on everything from boring bill payments to exciting excursions. He is also a strong saver, holding both a TFSA and an RRSP account in order to prepare for his future while taking full advantage of tax benefits.

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