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How to Build Credit Without Credit Cards
According to a recent study, there were 1.12 billion credit cards worldwide, a figure that is expected to rise to 1.25 billion by 2023 .
Maybe that’s why credit cards are considered the Swiss Army Knife among personal finance tools.
Not only can plastic users leverage their credit card for purchases, cash advances, and rewards and travel perks, they can use credit cards to build credit, too. After all, prudent credit card use with on time payments is one of the primary factors credit scoring agencies use to calculate credit cards. Taken together, on time payments and credit utilization – two mainstays with credit cards – comprise about two-thirds of credit scoring qualifiers.
That said, while credit cards can help credit scores; they can also be a hindrance.
“Sometimes they hurt more than they help,” said Renee McBride, founder of the Net Pay Advance personal finance blog. “For starters, many people get credit cards solely to use for expensive emergency purchases they couldn’t otherwise afford. If they’re part of the 75% of Americans that live paycheck-to-paycheck, they don’t have a lot of extra cash to put towards the debt.”
Other people have bad credit scores, and can only get approved for credit cards with incredibly high annual percentage rates. “Both of these situations can really hurt a credit score if the customer can’t afford to pay their credit card bill,” McBride said.
How to Boost Credit Without a Credit Card
The good news?
Credit cards aren’t the only way to build a robust credit score (although they can surely help.) For consumers who don’t like the potential debt risk that comes with credit card use, there are other ways to roll, credit-wise – and these non-card strategies are at the top of the list.
Get a personal loan. Opening loans, like a personal loan, and making on-time payments is another way to effectively improve your credit score.
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“Probably the best non-credit card strategy to create a robust credit score is through loans,” said Ty Crandall, EO and founder of Credit Suite, a consumer and business credit service in Tampa, Fla. “The premise is simple – you’re loaned money, you pay it back, and voila, you’re building a credit score.”
If you can’t qualify for a personal loan, work with a cosigner, such as family or a friend. “This not only works for personal loans, it also works for any type of loan, like student loans, auto loans, or a mortgage,” Crandall said.
Used correctly, other money experts say, a good personal loan can cut credit card interest by up to 50%.
Pay your bills on time, especially rent and utilities. “This strategy is effective since some rent and utility companies report your payment history to credit bureaus,” said Karen Condor, a finance experts with Loans.org. “Also, payments toward federal student loans are reported to the credit bureaus.”
Use credit builder loans. “A credit builder loan helps consumers build credit by offering a loan equal to an amount the consumer can deposit into an account,” said Randall Yates, CEO of The Lenders Network. “The monthly payments are taken from the account and reporter to the credit bureaus.”
Get a secured credit card. A secured credit card can also build credit, requiring a deposit equal to the credit limit. “Technically, it’s not a credit card,” Yates said. “But you’ll be able to use the card like a regular credit card and pay it off at any time. After a period of six months, the creditor may offer to return the deposit and make the card unsecured (which basically turns a secured card into a credit card.)
Leverage someone else’s credit. It’s possible to build credit health by using another individual’s good credit standing. “For example, you could become an authorized user on another person’s credit card,” Condor said. “This is effective if you make sure this person is a trusted individual with a good credit history.”
Becoming an authorized user on someone else’s’ credit card allows you to build revolving credit, or credit card based credit. “If you become an authorized user with someone with great financial habits, then you’re in luck,” McBride said. “So long as they make on-time payments, your credit score will continue to improve.”
Check your credit for signs of identity theft. If another person has stolen your identity and is using it to open several accounts in your name, that scenario can really damage your score. “Getting those accounts removed can effectively improve your score by a lot in a short period of time,” McBride said.
The Takeaway on Building Credit without a Credit Card
The fact is, you really don’t need a credit card to build robust credit health – but you do need proper money management skills.
“This is true with any form of spending and financing decision making,” Crandall said. “A credit score will be better, by definition, if you manage your money responsibly.”
“This means not spending too much, paying your debts on time, and keeping older accounts open, as the average age of your accounts is another big part of your credit score.”
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Brian O'Connell has been a finance writer at TheStreet, TheBalance, LendingTree, CBS, CNBC, WSJ, US News and others, where he shares his expertise in personal finance, credit and debt. A published author and former trader, his byline has appeared in dozens of top-tier national publications.