Most people build credit by using credit cards wisely. But not everyone gets approved for credit cards, and some people might want to avoid dealing with credit cards altogether. Here are some tips to build your credit without having a credit card.
- Establish bank accounts. Lenders see bank accounts as signs of stability.
- Open a joint credit card account with someone and let them manage it, as long as you remember that you’re just as responsible for the debt as the other person is.
- Consider using credit-like cards. If you’re staying away from credit cards because you don’t trust yourself to pay your bill consistently, then skip this step. But if it’s that you’re having trouble getting approved for a credit card, look into these “credit card cousins”:
- Secured card – Here’s how it works: You make a deposit to the issuing bank or credit union, and you get a card with a credit limit of that amount. This is similar to a prepaid card. The important things are to make sure the lender (preferably a bank or credit union) reports to all three credit bureaus, and watch out for fees! Anything that adds up to more than $100 in initial fees is a bad idea. You’ll still have to pay high interest and an annual fee, however.
- Charge card – These cards are just like credit cards, except they don’t allow you to carry a balance. You have to pay your bill in full every month. They’re provided by American Express and Diner’s Club, and there is usually no spending limit.
- Get a loan. Again, if you don’t trust yourself to make payments, this is not a good idea. Also keep in mind that a loan will only raise your credit score for as long as you’re actually in debt. Once the loan is paid off, it won’t help your credit much. You will also need to pay interest on the loan, whereas if you used credit cards and paid your balance in full every month, you wouldn’t have to pay interest. Whichever kind of loan you use, try to make sure the lender reports to all three credit bureaus.
- A secured loan uses either money in an existing account, or ownership of property (such as a car) as collateral. You might want to consider getting a secured loan from a credit union instead of a bank, as the former is usually more willing to look beyond just your credit score. If you have trouble getting this kind of loan, try to get a co-signer who has a high credit score to vouch for you.
- A peer-to-peer loan is offered by an individual investor, rather than a bank or credit union. You go to a lending site, where investors “bid” on the loan, competing to give you the lowest interest rate. Note that some lending sites don’t report to all three credit bureaus, and some have a credit score minimum. If you have trouble getting this kind of loan, try to get a co-signer who has a high credit score to vouch for you.
- Get a federal student loan if you’re a student. This kind of loan, however, will not benefit your credit score until you start repaying it.
- If someone you trust is getting a loan, you can ask to co-sign with them so that your credit will be linked with theirs. But only do this if you’re confident the person will pay the loan off diligently; any irresponsibility on their part will negatively affect your credit score for the life of the loan.
- Pay your bills on time, especially utilities. These type of bills [electric, phone, gas and cable] are often reported to credit bureaus.
- Avoid rent-to-own arrangements. You end up paying two to three times the original amount the item costs, and the lenders usually do not report to all three credit bureaus.