Build Your Credit Score Without a Credit Card
It's often said that credit cards are a necessity to get a credit score and have any chance of securing a loan, but there are ways to do it without credit cards at all.
The exact formulas for calculating your credit scores are proprietary -- and complicated. Only credit bureaus (such as
Experian
,
Equifax
(EFX) - Get Report
and Transunion) and
Fair Isaac
(FIC)
know the precise rules of the game. Regardless, the common wisdom goes, we have to play.
But do we?
Flirting with credit card debt can be dangerous. Rates and rules are often changed at lenders. Congress has recently taken renewed interest in credit card company abuses. And, for many, the temptation to overspend has left people awash in debt.
Fair Isaac says people should "apply for and open new credit accounts only as needed," not just to improve credit scores.
But, is it something people need to be worried about? Does eschewing credit cards put you at any sort of disadvantage when building your credit score?
"Not really," says Craig Watts, public relations manager for Fair Isaac Corporation, makers of the FICO score. By developing a consistent payment history on other loans, "Your score will gradually continue increasing until it reaches the ozone layer."
To get a score, you'll still need to get a loan, of course. But you can build your credit history taken out only loans you need, rather than cards you probably don't.
Here are four cardless ways to build a solid credit history.
Hit the Books
Federal student loans are probably the only unsecuritized loans you'll ever get where your credit score doesn't matter. Undergraduates can get between $3,500 and $5,500 annually, depending on their year in school. Graduate students have higher yearly limits.
The hitch, of course, is that you have to be a student to qualify. And though they're cheaper than credit cards, federal student loans still aren't free. Interest on Stafford loans runs 6.8%. So if you can pay upfront for your classes, it's a costly way to build credit history.
It may also be a time-consuming one. Some lenders may not begin reporting the loan until after you're supposed to begin paying it back, which could be years for a college freshman.
But if you need money for school, federal student loans give you a way to start building your credit score.
Borrow From Yourself
"Borrowing from yourself" is exactly what you're doing when you take out a secured loan from a bank. To take out a secured loan, you buy a Certificate of Deposit and take a loan out against it for the same amount over the same time period. You can then use the money you borrowed to pay back the loan. You'll be paying interest on the loan at the same time you're earning interest on the CD.
Alas, this strategy isn't free. Interest paid on the loan will almost certainly cost more than interest earned on the CD.
New York certified financial planner Cary Carbonaro doesn't encourage secured loans instead of credit cards, but, she says, it's been a successful way for her clients who can't get cards to turn around their financial situation.
Get a Co-Signer
Turning to mom, dad or another relative as a loan co-signer can help you bypass the credit card stage and take out only debt you actually need. Since the co-signer is also legally responsible for the loan, lenders can bank on being paid back, and you get to build your credit history by making timely payments. With a solid payment history, you'll eventually be able to sign on your own.
Be a Co-Signer
Alright, so you're gaming the system. But if you know of anyone with a high credit score who's taking out a loan, you can ask them if they'll allow you to be a co-signer. The loan -- and their payments -- will show up on your credit report, building your credit.
Beware, though, if they default on the loan, you're legally responsible. So be sure you're confident in their ability to pay the loan before taking on the risk.
If a Bank Says "No"...
Consider trying a credit union.
"Every lender is going to take a look at your risk and your credit history, whether a credit union or a bank," says Jim Hanson, vice president of the Credit Union National Association's Center for Personal Finance. "But credit unions are known for taking
a character element more into consideration."
Hanson says that in addition to the traditional factors that everyone looks at, credit unions may consider solid payment histories of items that don't show up on your credit report, take the length of time you've banked with them into consideration or give a member credit for attending a financial literacy class.
Michelle Dosher, a senior editor at CPF, says you can build a solid relationship with your credit union by opening a checking and savings account with a debit card, taking out a securitized loan and then taking out an un-securitized loan.
The path to creditworthiness need not be lined with plastic. But all the same rules of financial responsibility apply: Pay on time, don't overextend yourself, don't let bills go into collection and be sure not to get a judgment on your report. And be conservative. The mark of a good credit risk, says Fair Isaac's Watts, is someone who "is very resistant to the temptations that most of the rest of us succumb to on occasion."