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Financial Literacy 101: Can I build my credit score with nontraditional credit?

In our recent blogs, we've talked about what credit scores are, the state of credit in the U.S. today and the differences between traditional and nontraditional credit. Now, with Financial Literacy Month drawing to a close, we want to focus on the question that millions of American need answered: How can I improve my credit score?

It's a serious problem, but fortunately there's a serious answer: nontraditional credit. Not only can nontraditional credit help you to convince lenders that you're more credit-worthy than your FICO score suggests - you can actually use nontraditional credit to eventually rebuild your traditional credit rating.

Breaking the loop
There are a lot of reasons why it's rough to be stuck with a low FICO score, but maybe the worst is that it can make you feel like you're trapped in an endless loop. A low credit rating makes it tough to qualify for loans, which means you can't build up your credit history - and that's exactly what you need to do to improve your credit score!

That's not only frustrating - it's unfair. 

"Nontraditional credit helps break the low-credit-score cycle."

Nontraditional credit helps break this cycle. Remember, as our earlier blog pointed out, nontraditional credit takes into account payment history that traditional FICO scores overlook. FICO only takes into account  credit card, personal loan, mortgage and car loan payments. That's it. And those are all things that can feel out of reach or - thanks to exorbitant interest rates - unaffordable if you fall on the low end of the credit score range. But nontraditional credit factors in rent and monthly bills, including utilities, Internet, phone, cable and more. If you regularly make timely payments for those, your nontraditional score will be excellent.

Thanks to the Equal Credit Opportunity Act, businesses have to consider these nontraditional payments when evaluating any consumer's credit application. That means you can use your nontraditional credit score to qualify for, say, a car loan - even if you have a low FICO score. When you make your payments on that car loan, your traditional credit score improves.

That's not all. Starting last year, FICO announced a pilot program which allowed a dozen U.S. credit card issuers to use nontraditional credit to "identify creditworthy individuals who would otherwise be unlikely to obtain traditional credit," The Chicago Tribune reported. And once you get that traditional credit card, you can start building up your FICO credit score. 

A low credit score can be a major burden, but it doesn't have to be a permanent problem. Embracing nontraditional credit can be a powerful first step toward achieving a great credit rating. 

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