Building Credit Without Using Traditional Credit Cards
Conventional wisdom tells young people just starting out in their financial lives to go out and get a credit card to build their credit scores. For many people, credit cards seem like the best way to create a financial foundation and qualify for an auto or mortgage loan in the future. People with a low credit score may get the same advice on rebuilding their credit. However, other methods for building or reestablishing credit exist and may be a better fit for you. Here are some options to consider.
Personal Loans
Personal loans are familiar to many consumers as one of the most straightforward forms of lending available. The lender grants the borrower a set amount of money to be repaid in installments according to an agreed-upon schedule. The interest rate on a personal loan is typically higher than some other forms of borrowing, so lenders are more likely to take a risk on someone with a limited credit history or a lower credit score. As the borrower makes the payments on time, the lender makes a favorable report to the credit bureaus.
Student Loans
Student loans are easy to get and, depending on the lender, may not even require a credit check. While taking out student loans solely to build credit is not a sound financial strategy, if you have them anyway, you might as well maximize the benefit to your credit score. One of the fastest ways to build your credit is to pay your student loans back on time and pay them off as fast as possible.
Credit Builder Loans
Credit builder loans are a type of secured loan that allows you to demonstrate your creditworthiness with minimal risk to the lender. When you get approved for a credit builder loan, the lender puts the loan amount into a secured account and establishes a monthly payment amount. Credit builder loans are usually small, around $1,000, so most borrowers can manage the payments within a monthly budget.
Credit builder loans are unique because the borrower cannot immediately access the money in the secured account. Instead, borrowers make the agreed-upon payment amount until they have paid the bank a total equal to the loan amount. As the lender receives the payments, the institution makes a favorable report to the major credit bureaus. Once all the payments are complete, the borrower gets access to the funds in the secure account minus any fees the lender charges.
Secured Credit Cards
A secured credit card works similarly to a credit builder loan with a few key differences. With a secured credit card, the borrower puts down a cash deposit. The lender issues a credit card with a credit limit equal to the deposit amount. For example, if the borrower puts down $250 cash for the deposit, the credit card has a $250 purchasing limit. The lender takes on almost no risk since the deposit serves as collateral, and the borrower can’t spend more than that on the card.
Because of the low-risk nature of secured credit cards, lenders are more willing to issue them to people with limited or low credit scores. Borrowers should confirm that the lender will report timely payments to the major credit bureaus to get the most benefit to the credit score. As a bonus, many lenders will, either automatically or upon request, upgrade borrowers to an unsecured card after a period of demonstrated creditworthiness.
Authorized Users
An authorized user on a credit card has access to another borrower’s line of credit. For example, parents sometimes make their college-aged children authorized users on a credit card for emergencies. Authorized users have a card with their name on it but are not responsible for paying the bill. Because they aren’t taking on the liability for repaying the credit card, authorized users don’t need a credit score of their own. However, they still get a positive mark on the credit bureau report as long as the primary account holder keeps the account in good standing.
An authorized user arrangement carries significant risks for the primary cardholder and the authorized user. If the primary account holder fails to manage the account responsibly, the negative credit report applies to authorized users too. The authorized user can run up a significant credit card balance and leave the account holder responsible. The parties should set clear expectations and ground rules before entering an authorized user agreement.
Auto Loans
A loan to buy a car is a kind of installment account that gets reported to the credit bureaus positively when you make your payments on time. Even before you can qualify for a loan on a brand new car, you may be able to get a smaller car loan from a local bank or credit union for a used vehicle. Make sure you can afford the payment you are signing up for, and look for a reasonable interest rate. Once the car is paid for, you may have sufficiently increased your credit scores to qualify for a larger loan on a better vehicle.
Household Expenses
You may not think about your credit score every month when you pay your utility or cable bill, but paying those expenses on time is one way to build your credit without a credit card. While many landlords don’t have a reporting relationship with the major credit bureaus, it’s not out of the question. Services like Experian RentBureau and Experian Boost make it possible to get a positive mark on your credit score for managing these monthly expenses well.
No Matter What
Regardless of how you establish or rebuild your credit, remember that it’s critical to do these four things.
- Make your payments on time. Making payments according to the schedule you agreed to counts for up to a third of your credit score. It’s often a leading factor in credit decisions.
- Keep your credit utilization to less than 30 percent of your income. Credit utilization is a term that describes the ratio of how much debt you have compared to your income. Keeping it under 10% is ideal; the higher it grows, the slower your credit score goes up. When your credit utilization exceeds 50%, you may have difficulty achieving or maintaining good credit.
- Be consistent over time. The longer you make your payments on time, the higher your credit score will be and the faster you will recover from mistakes you might have made in the past. Successful credit management is a marathon rather than a sprint.
- Monitor your credit report regularly to ensure that all your accounts are reporting to the major credit bureaus. By federal law, you have the right to one free copy of your credit report each year to check for errors or fraudulent activity. However, this is an ideal time to check that all your creditors are reporting your success.
If you need help establishing a plan to grow or improve your credit scores, turn to the financial professionals at Coast Tradelines. You can find sound advice at your local bank or credit union, and the staff will be happy to establish a long-term banking relationship with a responsible borrower. Visit today to learn more about the financial options available to help you get your credit scores to a healthy level.
