How to Improve Your Credit Without Getting Into Debt
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Having a credit score can be important even if you don’t want or need to get a loan. Employers may run your credit before hiring you for a job. Or if you rent, your landlord may require a credit check before offering you a lease.
Having good credit has always seemed like a big game to me. You often have to prove that you’re a responsible borrower even if you don’t want to be in debt.
Some people play what I call the “credit game” very well. They get rewards credit cards to earn cash back and free travel, but pay the balances off in full each month so they don’t carry the debt for longer than 30 days. Or, they’ll use their good credit scores to get 0% APR offers on merchandise or other items so they can pay off the cash value over time.
While I actually don’t mind this strategy, I do believe that it’s not for everyone. Some people don’t want to play around with debt at all, and that’s okay.
If you’re looking to build your credit without getting into debt, here are a few options you can consider.
Secured Credit Cards
I know, I know. Using credit cards often means getting into debt, right? This isn’t really the case with secured credit cards. If you are looking to improve or establish your credit score, this is still a solid option.
With secured credit cards, you put down a deposit equal to your credit limit so you are basically borrowing money from yourself and not the credit card company.
For example, let’s say you put down $300 of your own money to start using a secured credit card. Your limit will be $300 so you can’t exceed spending the amount you put in initially.
You’ll only want to spend less than 30% of your limit each billing cycle, so maybe a small $25 monthly expense or payment will suffice.
The great thing about having a secured credit card is that the company will report your positive payment history to all three major credit bureaus. While some companies will offer you an unsecured credit card after a few months, you don’t have to accept it.
Instead, you can just keep using your secured card or even stop using it after a year but still leave the account open so you don’t lose your positive credit history.
Have Housing and Utility Payments Reported
Normally, traditional credit scores don’t include payment history for non-loan accounts like utilities, phone or internet bills, or your rent or mortgage. However, if you fail to make payments on any of these accounts, it may damage your credit score if you are reported to the credit bureaus.
So, no reward for paying bills on time but a negative remark for missed payments? Yes, in most cases, but you can consider using an alternative credit score that will consider those monthly payments.
According to the Equal Opportunity Credit Act, creditors are required to consider additional information about an applicant’s creditworthiness if the applicant requests it.
You can seek out an agency willing to help you generate an alternative credit report, which will include payment history for bills, rent or mortgage payments, etc. Some alternative credit bureaus include:
- Accurate Background
- Certegy Check Services
- First Advantage
Pay Off the Debt You Already Have
If you already have debt, it makes no sense to get into more debt just to boost your credit score. Your core focus should be paying your current accounts off.
If you have made late payments or have an account with high balances, just making extra and timely payments can boost your score.
For example, if you have a credit card or loan that is near the limit, paying it down will lower your overall credit utilization. Your utilization is an important factor in determining your score, which is why you should keep it below 30% at all times.
If you have student loans at a low interest rate, you can pay on them as scheduled and improve your credit over time. If you have credit card debt, be sure to keep the account open after you pay it off so you won’t lose that payment history on your credit report.
Become an Authorized User
Another option to build your credit without getting into debt is to become an authorized user for someone else’s credit card, such as a spouse or family member.
As an authorized user, you can make charges with your own card, but you won’t actually be responsible for paying it back since it is solely the primary cardholder’s job. Since you’re not liable, any negative information regarding the account can be disputed and removed if something does show up.
Parents consider adding their kids to their credit card accounts as authorized users to help them build credit without too much risk.
The positive is that as long as the primary cardholder makes timely payments, it will have a positive effect on both of your credit scores. Just be sure to check that the credit card company will report to the major credit bureaus for authorized card users as well as the primary cardholder.
Alternative Option: Buy Only What You Can Afford to Pay for in Cash
There aren’t too many options when it comes to building your credit without getting into debt. Unfortunately, the whole system is based on your being a “good borrower” and paying back your loans and credit on time.
If this doesn’t interest you, you CAN simply opt out of using credit. Sure, it may a challenge if you’re looking for a job, car, or apartment, but there are other ways to demonstrate that you can pay your bills on time. You can get an alternative credit score, use references, or show receipts from past payments for certain bills and utilities.
Also, consider buying everything in cash. If you do that, you may not even need to worry about your credit score. This can be difficult when you consider big-ticket items like a home. But, if you live in the Midwest where homes in smaller suburbs are cheaper, you may be able to pull off a cash purchase after a few years of aggressive savings and own your home outright.
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