Your credit score is more than just a number. It can help you qualify for the apartment of your dreams, save money on your car insurance or help you secure funding to launch a new business. That’s why it’s so important to manage your credit wisely.
The good news is that you don’t have to rack up thousands of dollars in debt to build a strong credit profile. Follow these tips for building credit without debt, and you’ll be able to reap the benefits of having good credit without worrying about paying back large loans or credit card balances.
1. Open a Credit Card
If you’ve been avoiding credit cards because you think they’re a gateway to debt, think again. Like other financial products, a credit card is simply a tool. If you can afford to pay off your card completely each month, a credit card can help you boost your credit score. It’s when you start charging items you can’t afford that you start to run into problems.
Once you have a credit card account, make at least one small purchase each month to show a history of steady usage. Avoid carrying a balance from month to month to ensure you don’t pay any interest on your purchases. Over time, your score will increase, but you won’t have to worry about paying back thousands of dollars in debt at rates of 20% or higher.
You might not qualify for a traditional credit card if you have a low credit score or have never had any credit accounts. Another alternative is to sign up for a secured credit card instead. You pay a cash deposit with a secured card to establish a credit line. For example, if you deposit $1,000, your initial credit line should be $1,000. This means you can use the card to make up to $1,000 in purchases before you have to make a payment.
2. Ask Your Landlord to Report Your Rent
It’s difficult to build credit if you don’t have any open credit accounts. One way around this is to ask your landlord to report your monthly rent payments to the credit bureaus. Several reporting services work with landlords to collect information about their tenants, making it easier to build credit even if you’re not willing to open a credit card or apply for a loan.
Not all landlords are willing to pay for a reporting service or keep up with monthly reporting tasks. If this applies to you, it’s possible to sign up for one of these services on your own. As you review your options, ask the following questions:
- How much does the service cost?
- What security measures does the service use to keep your data safe?
- Does the service report to Equifax, Experian and TransUnion, or does it only report to one credit bureau?
- Are you locked into a contract when you sign up for the service?
- How does the service treat late rent payments?
- What happens if you miss a rent payment?
3. Become an Authorized User
If you don’t want to or can’t open your own credit card, ask a trusted friend or family member to become an authorized user on one of their accounts. Authorized users are allowed to make purchases, but they can’t access other account features. If the account gets reported to the credit bureaus, you can benefit from your loved one’s credit history.
Although becoming an authorized user can help you build credit, it’s not without risk. If you take this approach, make sure the person you choose has a history of paying their bills on time. Once you’re an authorized user, their habits will affect your credit. If they miss a payment or make several late payments, your credit score will take the hit, even though you’re not the primary account holder.
4. Take Out a Credit-Builder Loan
A credit-builder loan is similar to a secured credit card, requiring you to make a cash deposit. Once the lender has your money, they put it into a savings account or a certificate of deposit. The money remains in the account until you “pay off” the loan by making monthly payments. This is an effective way to build credit because credit-builder loans are classified as installment loans. Making monthly payments over 6 months or more shows that you’re responsible enough to handle other types of credit.
Before you take out a credit-builder loan, make sure that the lender reports payments to the credit bureaus. Otherwise, the loan won’t help you build a stronger credit profile.
5. Sign Up for Alternative Credit Monitoring
Experian Boost, Experian Go and other alternative credit monitoring programs allow you to build credit based on things that aren’t typically reported to the credit bureaus. For example, you can use one of these tools to report your monthly utility payments or your streaming subscriptions.
Start Building Credit Without Debt
As you can see, there are several ways to build credit that don’t involve taking on insurmountable levels of debt. If you start using one of these tools today, you’ll be on your way to better credit by tomorrow.
You might also be interested in: 13 Credit Myths Debunked – Get the Facts
