It comes as no surprise to read that credit cards aren’t appropriate for everyone. The majority of card holders use them in a disciplined manner, which is reflected in their relatively high personal credit score. But is it possible to develop a high credit score without credit cards? It’s not easy, but it can be done.
First let’s look at what won’t build credit.
Phone/utilities A very popular misconception, but cell phone, power, and gas bills do NOT build credit. The reason the cable or phone company checks your credit when you open a new account is do determine if you have a history of paying your bills. And while these companies won’t report your on-time payments to credit bureaus, they will report your account as delinquent if you stop paying. In short, these bills can hurt your credit, but they can’t help it.
Rent Like utility bills, rent generally won’t be reported unless you break your lease and stop paying. But your continued on-time payments? They are not reported to the credit agencies.
Debit/Prepaid Cards Some think because the bank asks for your Social Security Number when ordering a debit card, that the card will help build good credit. That’s not the case, as banks require your Social Security number to help verify your ID, not for credit reporting purposes.
No credit Whether it’s credit cards or another type of credit, you need some sort of credit accounts to build credit history.
So, what can you do to help build credit while you are credit card free:
Secured Cards These vary from traditional credit cards in that they require a security deposit. The deposit serves as collateral in the event that you cannot make the payment, and is generally equal to your credit limit. For example, if you put down a security deposit of $200, your credit limit would be $200. If/When you decide to close your account, you get your deposit refunded. Keep in mind that while you won’t be able to spend more than your deposit, if you don’t pay your bill each month then you’ll be charged interest. Also, each secured card may come with various fees and maintenance costs, so be sure to compare and read the complete details.
Car Loans Even if you have limited credit history, you still may be able to get approved for a car loan. However, the less credit you have, the higher interest rate you’ll probably pay. Pay attention to the overall price you are paying, not the monthly payment. The amount of your monthly payment can be manipulated to seem high or low, based on the length of the loan.
Student Loans Like a car loan, a student loan might be difficult to secure with no credit or lousy credit. But, if you can secure a student loan — even a small one — and pay it down accordingly, that will be reflected on your credit score.
CD Loans If you have some money held in a Certificate of Deposit (CD) at a bank, you may be able to “borrow” the money. In short, you are borrowing money from yourself. The bank uses your CD as collateral and loans you the money. Not every bank and credit union offers these, so you may have to hunt around. When you find one that does, make sure they actually report your loan to the credit bureaus (otherwise it will be pointless for building credit).
Parent’s Account If a parent adds you to their credit card account, that will show up on your credit report (assuming they add your Social Security number and not just request a secondary card in your name). Not necessarily a recommended option, as your credit is negatively impacted if your parent makes a late payment, but still an option if managed carefully.