Creditworthiness is something that every financial institution considers before lending anyone money.
A credit report showing responsible credit use can make borrowing to buy a home or car more affordable through lower interest rates. It can also be evaluated by employers when you apply for a job, by landlords when you want to rent an apartment, and by car insurers when they set their rates.
“We use credit every day,” says Jeanne Kelly, a New York-based credit coach and founder of the Kelly Group. But everyone starts with a clean slate, and building a loan can take time.
What credit rating do you start with?
Credit scores are three-digit numbers created from information in your credit report, including payment history and the amount of your outstanding debt. The score tells lenders how likely you are to pay back what you borrowed.
To receive a score, your credit report must have one or more accounts that are at least six months old and at least one account reported within the past six months with any of the three credit reporting agencies — Equifax, Experian, or TransUnion.
Credit scores range from 300 to 850. A lower score indicates a higher risk of not paying your bills based on your history. “Without good credit, you may get a high interest rate or, worse, you may not even qualify for the loan,” says Lyle Solomon, principal attorney for Oak View Law Group, a California-based firm specializing in consumer finance.
A good credit score is 670 or higher according to the Fair Isaac Corporation (FICO) rating model. Another scoring model used by financial institutions is VantageScore, which considers 661 or higher to be a good score.
6 ways to build credit without a credit card
Opening a credit card, making purchases, and paying off your balance each month is a common way to build credit from scratch. But it’s not the only way.
In fact, 10% of your FICO score is based on your “credit mix,” or what types of loans or lines of credit you have. If you’re just starting out and have little or no payment history, your credit mix is even more important, according to MyFICO.com.
Here are six alternatives to opening a credit card to build credit.
1. Construction loan
A construction loan essentially allows you to borrow money from yourself, Kelly explains. It’s an installment loan with fixed monthly payments, but instead of giving you the money up front, the lender deposits it into a savings account or certificate of deposit (CD).
Some banks withhold access to the account until you’ve paid off the loan in full, while others release some money monthly if you make timely payments. “The good thing is that you show a payment history and the money comes back to you, so it’s a loan to yourself,” says Kelly.
However, these loans often charge interest and a processing fee, so make sure you understand the total cost before getting one.
2. Personal loans
Personal loans, which can be secured or unsecured, allow you to borrow a large or small amount of money that you can use for anything. You repay the loan in fixed installments over several years. The lender reports the balance and your ongoing payment activity to the credit bureaus.
With low or no credit, it can be difficult to qualify for a personal loan with a competitive interest rate. Asking a trusted friend or relative with a good credit history to co-sign the loan can help you get approved and may result in a better interest rate.
However, Kelly warns, the co-signer should be prepared to step in if you are unable to make a payment on time, as a late or non-payment also affects their creditworthiness.
3. Car Loan
A car loan is money you borrow from a car dealer or third party to buy a car. A cash deposit is usually required, although this is not always the case. And with no credit history, you might want to add a co-signer to qualify for a better interest rate.
Payments are part interest and part principal and are due on the same day each month until the balance is repaid. If you miss a payment, the lender may be able to repossess your car. It is similar to a mortgage in this respect as the loan is secured by a physical asset. As with other loans, the lender is responsible for reporting your auto loan payments to the credit bureaus. A history of on-time payments will improve your credit score.
4. CD Loan
A CD is like a savings account, except your money is locked up for one to five years. The downside is that you can earn more interest than if you kept your money in a traditional savings account. You can always withdraw your money early, but you will pay a penalty.
A CD loan is when you take out a loan and use the CD as collateral. That means you get a cash lump sum and then each month you pay back what you borrowed plus interest to the bank. If you miss payments, the bank can take your CD and even impose a penalty, Solomon says. “Using a CD-backed personal loan to improve your credit score only works if you make payments in full and on time,” he adds.
5. Federal Student Loans
The US government loans students money to pay for bachelor’s and master’s degrees and career certification programs — and you don’t need a credit history to qualify.
Unlike private student loans, there is no credit check to obtain most government student loans. Instead, eligibility is based on citizenship, enrollment, and in some cases financial need, so starting credit building early can be a good way to do it.
Making payments on time improves your credit score, while late or missed payments have a negative impact. “Student loans can also help you improve your credit score by increasing your average account age and diversifying your loan mix,” says Solomon.
Some student loans are only repaid after the borrower leaves school, known as forbearance. Even if you don’t make any active payments during the deferral, your credit report will still show the loan as good.
6. Peer to peer lending
Peer-to-Peer (P2P) lending platforms help you borrow money from individuals instead of a bank or credit union. Investors lend money and earn on the interest you pay on the loan.
“In general, P2P lenders look for ratings in the fair to excellent range, ie 580 or more,” says Solomon. So you need some credit history to be eligible. “Because the whole process is online and streamlined, you can get a loan in just a few days if you qualify,” he adds.
Another benefit is that P2P lenders only perform a soft request to verify your credit report, Solomon says. Traditional lenders usually run a harsh inquiry that could hurt your credit score.
One downside to using P2P platforms is that if you miss a payment, they may send your account for collection quicker than a traditional lender.
If you’re potentially looking to speed up the credit-building process—or are still reluctant to borrow money—here are some additional strategies to improve your score.
- Piggyback on someone else’s good credit rating: Many credit card companies allow cardholders to add authorized users to their accounts. As an authorized user, you may be given a card to use for purchases, but the main account holder is ultimately responsible for payment. The potential benefit to you, assuming the primary account holder is a responsible borrower, is that their credit account appears on your credit report along with payment activity. But not all lenders report authorized users to the credit bureaus, Kelly says, so make sure that’s an option before you tangle with another borrower.
- Report rental and utility payments to the offices: The big three credit bureaus do not require landlords and property managers to report rent or utility payments, but they will welcome the information if it is submitted. If you pay your rent and utility bills on time, you should ask your landlord if they can report your payments to the credit bureaus, or do it yourself. There are several online services – many are free, but some charge a one-time or monthly fee – that you can sign up for. Some of them will even report positive payment history over the past two years.
- Report recurring invoices to the offices: Reporting recurring payments, such as B. Streaming subscriptions and cell phone plans is another way to prove reliable Pay the bill. Various online services, including one offered directly by credit bureau Experian, allow you to connect the bank accounts you use to pay your recurring bills and then report those with a positive payment history to any or all three credit bureaus.
- Pay bills on time: The most important factor in building good credit is payment history, which accounts for 35% of your FICO score. Full, timely payments on any loan or line of credit are essential to maintaining a strong credit history.
take that away
The best way to build credit is to borrow money and pay it back on time. You can do this through credit cards or installment loans, although it can be difficult to qualify for both if you don’t have a credit history to back you up. The solution can begin with options that don’t require a credit check, such as federal student loans or capital loans, or options that require collateral against a lower interest rate, such as a mortgage. B. CD loan.
You can also sign up for a service that provides debt-free bills that you regularly pay on time, such as B. Monthly subscriptions or rent, reports to the credit bureaus. “These are things that can work just as quickly [as loans] and they’re inexpensive,” says Kelly. “Those are building blocks.”