3 Ways to Build Credit Without a Credit Card
Whether you’re applying for a mortgage, looking to rent an apartment, or shopping around for an auto loan, there’s one number that will dictate whether or not you’re approved: your credit score. That’s why you want your credit to be as strong as possible, and a good way to get there is to open a credit card.
How do credit cards help credit scores? For one thing, if you pay yours on time every month, you’ll boost your payment history, which is the most critical of five factors that go into determining your score. Having a credit card can also help bring down your credit utilization ratio, which is the second most important component of your score.
But while credit cards can help your credit, they can also open the door to uncontrolled spending. Case in point: As of late 2016, the average American household was carrying about $16,000 in credit card debt. Therefore, if you can’t trust yourself to use a credit card responsibly, you’re better off not opening one and building credit another way. Here are some options in that regard.
1. Pay your bills on time
We all have bills that come up on a monthly basis, whether it’s your electric bill, your cable bill, or your student loan bill. As stated above, credit cards can help boost your payment history when you pay them on time consistently — but you can achieve the same results by paying your regular bills on time. So take a look at your various expenses and when they’re due, and set up a series of calendar reminders to ensure that you never miss a payment. Another option? Sign up for autopay, which either your bank or your individual billers will generally allow for.
2. Take out a credit-builder loan
As the name implies, credit-builder loans are designed to help people boost credit. They’re offered by credit unions and some banks — namely, community banks. The good thing about credit-builder loans is that you can typically get one even if your credit isn’t great. However, you do need the money to be able to pay off that loan. As such, the amount you borrow is held in a bank account while you make your payments so that your lender is assured it gets its money. Then, as you make your on-time payments, they get reported to the major credit bureaus so that they eventually come to boost your score.
3. Report your timely rent payments
You’re required to pay your rent on time every month, so if you’re in the habit of doing so, why not have it work in your favor? There are a number of rent-reporting services out there, like RentTrack and Rental Kharma, that help ensure your timely rent payments are added to your credit record, so it pays to look into them.
The key to building good credit is to establish a strong pattern of paying your bills on time — and you don’t need a credit card to make that happen. If you tend to be responsible with finances and feel that having a credit card won’t lure you into frivolous spending, then there’s really no harm in getting one, especially if you’re looking to build credit. Charging just a small amount each month on your card and paying it off will work to boost your score, and you might snag some neat rewards for buying necessities like groceries and gasoline.
On the other hand, if you’re worried about having a credit card, don’t get one. You’re better off working a bit harder to boost your credit score than racking up debt and wrecking your finances in the process.
Originally published at www.fool.com on May 2, 2018.
