If you read this blog regularly, you know that I’m a big proponent of responsible credit card use. I believe that, when used as intended – as in, you don’t overspend and you pay your balance off in full each month – credit cards can be helpful and useful tools for establishing good credit and good financial habits. When you have good credit, it’s much easier to do things like find a job or a place to live, to get approved for a loan, and so on.
Of course, it’s not always easy to build a solid credit history. What happens if you’ve made some mistakes in the past and have a less-than-perfect credit score to show for it? Or what if, for whatever reason, you don’t even have a credit card? Folks in situations like this often find themselves in the classic “Credit Card Catch-22”: You have to have good credit to get a credit card – but you can’t get a credit card if you don’t have credit.
See the problem? It’s a tough situation, to say the least. That’s why I decided to put together this list of ways to build (or rebuild) your credit – without using credit cards.
1. Apply for a “secured” loan. Secured loans (or “credit-builder loans,” as they’re often called) are offered by credit unions or banks. Here’s how a secured loan works: You apply for the loan, which is typically for a relatively small amount, (for the purpose of this example, let’s say it’s $500). Once your loan is approved, your bank or credit union puts that $500 into an interest-earning savings account. You make monthly payments until you’ve paid off the $500, and then, when your loan is paid off, you get the $500, plus the interest you earned while you were paying off your loan. It’s a win-win — just make sure that the credit union reports your loan to the three major credit reporting bureaus (Experian, Equifax, and Transunion).
2. Make your rent payments count. Although rent payments aren’t officially a part of your credit score, the credit scoring company Fair Isaac Corporation (FICO) uses a “FICO Expansion Score” in order to help “underserved” consumers (in other words, folks with little to no traditional credit history). This expanded credit scoring system makes use of information that is usually overlooked in credit reports, including rent and utility payments. Granted, the FICO Expansion Score doesn’t carry as much weight as your traditional credit score, but if you are looking for a way to get your foot in the door, so to speak, this is a good option. If you want to make your payments count, check out sites like RentalKharma.com and RentReporters.com. These companies report consumers’ rental and bill payment activity. Before you sign up for a service like this, just make sure to do a little research first. Make sure that they actually report the three major credit reporting bureaus – and make sure to ask about any fees associated with the service.
3. Have a steady job. Your job doesn’t actually appear on your credit report, but that doesn’t mean that job-hopping or long periods of employment won’t go unnoticed. When you apply for a credit card, most creditors want to check out your employment history and income history (in addition to looking at your credit history, of course). They use this data to determine whether or not you would be a good credit risk based on how long you have kept your job and if they can see that your income has risen. In other worse, it looks good if a potential creditor sees that you’ve held the same job for a long period of time – especially if your income has steadily increased. Basically, this means that your employer sees you as a valuable asset to the company, and that you have a stable job and a steady source of income.
4. Become an “authorized user” on someone else’s credit card. This can be especially helpful for young people who don’t yet have a credit history of their own. For example, if you are an authorized user on a family member’s credit card, you get all of the privileges of using a credit card, and you are responsible for any purchases you make. And, your status as a responsible “authorized user” will show up on your credit report. Of course, because you are only a user on the account, you are not held responsible if the account holder, say, doesn’t pay the bill. It’s not quite the same as having your own credit card – but it’s a relatively safe way to start building credit.
5. Consider a secured credit card. I know, this post is supposed to be all about building credit without credit cards – but secured credit cards are a little different, and I think they’re worth considering if you are trying to build or rebuild your credit. With a traditional credit card, you are given a credit limit – a set amount that you can spend, based on factors like your credit history, your income, and your existing debt. Unlike a traditional credit card, a secured credit card does not have a limit. Instead, a secured credit card is tied directly to a bank account. The funds in the account serve as collateral – in other words, if you have, say, $1,000 in your account, your credit limit is $1,000. There are a few drawbacks to secured credit cards – for instance, they typically have higher interest rates than traditional cards. But if you’re struggling to build solid credit, they can be useful tools.