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Building credit is a big deal as you navigate through adulthood. While it may not seem as critical now, your credit score is one of the most important numbers potential lenders use to determine if you can get a mortgage or other type of loan. Using a credit card wisely is one of the quickest paths to credit-building — but it’s not the only way. Let’s look at how you can build and improve your credit, even if you’re starting from scratch or have bad credit.
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Building credit without a credit card
Credit cards can be advantageous for quickly building credit, but other options can be just as impactful to your score. Let’s take a closer look.
1. Take out a personal loan
A personal loan is a lump sum payment you receive from a lender, and in turn, you must make installments as agreed, typically each month and with interest. Installment payments are reported to the three major credit bureaus— Equifax, Experian, and TransUnion. This means your credit score is impacted by your on-time payments and how much of a loan you take on.
The funds from personal loans can be used for virtually any expense, from paying off medical bills to funding a wedding. While it can be convenient to access a lump sum and build your credit profile quickly, it comes with risk. Personal loans are often subject to much higher interest rates and fees, making them an expensive borrowing option.
A credit builder loan is similar to other loans because you are paying back the amount borrowed in monthly installment payments. However, unlike other loans where you receive a lump sum payment upfront, the lender deposits your monthly payments into a savings account or CD and you won’t be given access to the lump sum payment and receive the cash deposit until your loan is paid in full. It’s not as quick of an option as a personal loan, but it does force you to set aside a specific amount each month.
The biggest advantage to a credit builder loan is your monthly payments are reported to the three credit bureaus. Your payment history can either positively or negatively impact your credit score, so this means on-time payments will help you quickly establish a credit score and improve it too.
3. Take on a car loan
An auto loan is another common installment loan that can help you build your credit. Not only are your payments reported each month, but installment payments are used to determine your credit mix. Your credit mix is simply the type of credit you have, including both revolving (such as credit cards) and installment loans. Lenders prefer to see a good credit mix, which shows how well you manage various forms of credit.
Auto loans often have lower interest rates versus personal loans or credit cards, but it’s important to shop around and compare the ones with the lowest interest rates and the lowest amount of fees.
4. Become an authorized user
Perhaps you don’t want to take on a monthly payment, or taking out a loan isn’t an option. Another way to build credit is to become an authorized user on someone else’s credit card. An authorized user can use the credit card but is not responsible for monthly payments.
The best approach if you choose to go this route is to be an authorized user with someone you know makes on-time monthly payments and doesn’t carry much of a balance. Before signing up, have the account holder call and verify that the account will be added to the credit profile of the authorized user, otherwise, it won’t impact your score.
5. Report rent and utility payments
We typically think of installment loans and credit card payments as the only reported information on a credit profile. Still, there is a way to add your on-time rent and utility payments. Doing so can positively impact your credit score and get “credit” for something you’re likely doing anyway.
Experian offers the Experian Boost, which uses the payment history from utility companies, streaming companies, and some property management companies to boost your FICO score. It’s a free program, and I can tell you from personal experience it really can boost the score by several points.
There are other companies offering rent payment reporting but before you agree to any kind of reporting, confirm if the property management company you rent from actually reports the activity to the credit bureaus.
Both federal student loans and private student loans are reported on your credit report, which means making on-time payments can have a positive impact. They show up as installment loans on your profile, and all your payment activity is reported on a monthly basis.
While having a positive payment history is a good thing for your credit score, late or missing payments can cause major issues for your score. If you’re concerned you can’t make your payments on time, consider either refinancing your private student loans into a lower interest rate or longer repayment term. If you have federal student loans, you can contact the loan servicer to modify the payments to an income-based repayment plan, deferment, or a loan forbearance program.
7. Apply for a secured credit card
Yes, a secured credit card is technically a credit card, but it can be an essential tool for establishing a credit score or helping you improve your current one. A secured credit card means you secure your credit line with a security deposit. Most issuers require you to put down at least $200, and if you want a higher credit line, then you’ll have to put down even more.
The good news is, secured credit cards have much less strict approval requirements, as long as you can put down a security deposit. While it’s similar to a debit card where you can only spend what you have available in your account, it is a way to get access to credit. Before you apply, confirm the secured credit card issuer does report to the credit bureaus (not all do). You can usually upgrade to an unsecured credit card after months of on-time payments and responsible usage.
Several factors are used to assign a credit score to your credit profile. Each scoring model from the major credit bureaus uses a different calculation, but you can generally expect the following factors: History of on-time payments each month; credit utilization (the amount of credit you use versus your credit limit); length of your credit history; how often you apply for new credit; and credit mix, including how many revolving accounts and installment loans you have.
How can a beginner build credit?
There are multiple ways a beginner can build their credit, including paying each of your bills on-time and in full each month. You can also use a secured credit card, which allows you to build credit while using a credit card, but your line of credit is typically equal to the amount you put down for a security deposit. Additionally, it’s important to stay on top of your credit report by checking it at least once a year, which you can do for free, and reviewing all the reported information.
What is a good credit score?
A credit score is a three-digit number assigned to your credit profile and is calculated off the information added to your credit report. Each of the credit bureaus uses different calculations and lenders use these scores to determine if an applicant is more or less risky to lend money to. The credit score range is 300 to 850, but a good credit score is considered good if it’s above 700.
It is possible to build your credit, either from nothing or by improving your score, without a credit card. The key to almost any of these suggestions is to make on-time payments and get credit for as many timely payments as possible, such as utilities and rent. By taking advantage of one or more of these ideas, you can get your credit rating on track and learn to manage your credit wisely—an essential part of financial management.
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Sara Coleman is a former corporate gal turned creative entrepreneur. She began writing professionally several years ago and now contributes to multiple websites, blogs, and magazines. She’s also an avid reader and can’t resist a great historical fiction novel. Sara holds a BA in journalism from the University of Georgia and can be found supporting her Bulldogs every chance she has. She resides in Charlotte, North Carolina, with her wonderfully supportive husband and three children. When she’s not ushering her kids to sports and dance lessons, she can be found creating content for her own website, TheProperPen.com.
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