Credit makes the world go round – at least in the world of money and finance. Most of the major steps you take in life and most of the major milestones you complete in life – buying a home or financing a car, for example – require you to (1) have credit and (2) have a good credit history. Without credit and a good credit history, it can be hard to make any major purchases in your life, even something like financing the furniture for all of the rooms in your new home).
That’s the tough news – good credit is required, well, for almost anything.
The good news is that you do not have to use credit cards to start building and continue to build up a good credit history. Here are five ways you can leave the plastic behind and still accomplish your goal of building a good credit history.
1. Make On-Time Payments
It may even be something you heard spill out of your mom’s mouth when you were growing up. It might have sounded something like, “Always pay your bills and always pay them on time.”
It seems so simple, right? It goes way beyond simplicity, however, because paying your bills on time is one of the biggest factors in calculating your credit score.
According to FICO, 35% of your credit score calculation comes from making on-time payments. It’s so important that it is worth repeating – always pay your bills and always pay them on time.
When you make late payments, it reflects negatively on your credit (which is obviously the opposite of building credit and building good credit at that). Find a system that works for you to always make on-time payments and use it. Some people mark their calendars, while others automate their bill payments. As long as the system works for you and your billing dates, then use it to help you build a good credit history by always paying your bills on time.
2. Everyday Bills & Expenses
Credit card companies are not the only creditors that report to the three credit agencies (Equifax, Experian, and TransUnion). Technically, you don’t need to use a credit card to start building (and continue building) good credit at all. Mortgage companies, some property managers (if you rent), utility companies, and car financing companies are some of the types of companies that report payments, payment history, balances, and payoffs to the three credit bureaus.
If and when you have any of these types of bills or obligations in your name, you can use making on-time payments to your advantage.
Again, you have to always make the payments and always pay them on time to help you use your everyday bills as a credit builder, but it definitely contributes to your credit score and building your overall credit.
3. Collateralize Your CDs
If you have one or more certificates of deposit (CDs) with a financial institution, you can use these CDs as collateral to obtain a loan from the financial institution (be it a bank, credit union or other financial institution).
Since you are using the CD as collateral, if you do not repay the loan, the institution has the right to liquidate your CD(s) in order to recoup their costs. You wouldn’t want that (not only because it takes your investment away, but also because it would negatively affect your credit), so if you go this route, repay the loan.
The repayment of the loan – the payments you make on the loan – are reported to the credit bureaus. On-time payments for these collateralized loans contribute to your credit score and to ultimately helping you to build credit.
4. Make it Personal
Credit unions and banks often offer personal loans or signature loans. If you have an existing relationship with a bank or credit union (meaning you have a checking or savings account with them), you can apply for and receive a personal loan or a signature loan.
These types of loans do not require you to have collateral that you put on the line to receive the loan. You do not have to put your CDs, checking or savings account on the line to obtain one of these loans, so it’s different from a collateral loan.
Repayment of the loan, however, does contribute to your credit. Banks and credit unions report these payments to the credit bureaus, so when you make the payments on these loans and ultimately pay off these types of loans, your credit benefits from it.
5. Lean on Your Peers
Peer-to-peer loans are another option for helping you to build credit without turning to credit card usage (plastic). This doesn’t mean go out and borrow money from your bestie and then expect that repaying him or her is going to boost your credit score or put a foundation in place to start building your credit history.
Peer-to-peer loans are alternatives to traditional loans and typically require you to approach a lending club (made up of peers or a group of investors with money to lend) to request a loan. Think of it as cutting out the middle man (the banks), so the group of peers is lending out their own money.
Peer-to-peer groups usually report to the credit bureaus, so taking one of these types of loans and repaying it can help you to build credit. Before taking out a peer-to-peer loan as a credit builder, verify that the group does report to one or more of the credit bureaus.
When people think of building credit and a credit history, one of the first things that tends to come to mind is credit cards. It’s not necessary to run out and apply for all of the major credit cards, store and gas credit cards to start to and continue to build credit.
In fact, numerous other ways exist and act as credit builders. Use one or more of these five suggestions to jumpstart your credit-building endeavor – and leave the plastic behind.
How have you improved your credit without using credit cards?