How to Build Credit Without a Credit Card
In a country like the United States, it is virtually impossible to make it through life without building credit. Whether you want to rent an apartment, trade in a car, or purchase new living room furniture, you’re probably going to need credit. “No credit” and “bad credit” are not exactly the same things, but they can be equally difficult to work with. If you have no credit, how do you get to having credit? Here’s a look at how to start building your credit.
Avoiding Credit Cards
One of the easiest and most common ways to start building credit is with a credit card; many companies offer cards specifically for people in your situation. These cards come with a low balance and generally have no annual fees, although the interest rates can skyrocket after your introductory period (plan on about 20%). But once you start using one credit card, the offers will start rolling in, and it is easy to get carried away. Suddenly, you’ve gone from no credit to bad credit. So what other options do you have?
Other means aside, you can use someone else’s credit card to get a little boost. No, we’re not talking identity theft. A family or household member can make you an authorized user on their own credit card. You don’t actually have to use it (they don’t even have to give you your own card), but your credit may improve through osmosis.
Taking Out Loans
A credit building loan is a small loan with generally low interest rates created specifically to allow someone with no credit to take out a loan and build their credit up. Usually it is deposited into a savings account rather than giving you the amount upfront. You can’t actually touch the money until you’ve paid it off, and not only is the loan itself low interest, the savings account may bear interest—which means you can actually make money off the loan.
Similarly, if you already have a sizable savings account or CD, you can get a loan for the amount the bank is already holding for you. Despite your credit, they know the money is available to them if you don’t make your payments. In either scenario, making payments on time and eventually paying off the full amount will do wonders for your credit score.
Credit building loans are more often a tool available from smaller banks or credit unions. Other types of loans, such as student, personal, and (sometimes) peer lending loans can provide a similar service, but it is easy to get in over your head when you start taking out loans. Plus, you aren’t guaranteed the lower interest rates that credit building loans have.
General necessities requiring a monthly payment can impact your credit score. Some rental companies report to the credit bureau, which means that regularly paying your rent on time could be building credit. Other places that base deposits off credit levels include cell phone contracts and some utilities. Additionally, if you need a car, most places will try to get you a loan so you can drive it off the lot. They often work with companies more likely to give loans to people with questionable credit scores than a bank. Just watch your interest rates; the worse your credit score, the higher your interest is likely to be.