Do you have a “thin credit file”? If you do, you’re one of the 25% of Americans who have little or no credit history and don’t use credit enough to build a sufficient FICO credit score. Since having “good credit” (and a good FICO score) is extremely helpful in many ways financially, we decided to put together a blog today to help people who want to start building their credit but either don’t want to or simply can’t get a credit card.
Indeed, there are quite a few ways to build up your credit that don’t require you to have a credit card at all, including credit builder loans, alternative credit scores and Passbook or CD loans. Let’s take a look at those options and see which one may be right for you. Enjoy.
- Credit Builder Loans. Like a savings plan, Credit Builder loans give you a “taste” of handling credit but at a very low risk to the bank or credit union that’s lending you the money (and also to you) in. In effect what you’re doing is lending money to yourself. For example, you could put $1000 into a bank or credit union interest-bearing account. (This can be done in a lump sum or, if necessary, in 10 – $100 a month payments.) Once that entire amount is deposited you can then use it as collateral to take out a $1000 line of credit, using that money and repaying it as you see fit. You’ll be paying higher interest rates than what you actually earn but the good part is that you’ll get experience working with credit and, if you make sure to pay on time every month, that “positive history” will end up on your credit record.
In the case of a credit builder loan, both banks and credit unions report your history to the Big 3 credit reporting agencies and, better yet, this information will help to build your FICO score.
- CD Loans or Passbook Loans. Some banks will let you borrow against a Certificate of Deposit (CD) if you have one. Depending on the bank you may be able to borrow up to 100% of the amount in your CD, but some will restrict you to a little bit less. The drawback is that you’re going to have to pay a small origination fee and more interest than what you’re actually earning on the account. You also can’t touch that CD or your savings account until the loan is completely repaid. The good part is that it will show up on your credit record as a “secured installment loan”, something that can help you to build your credit as long as you pay the money you “borrowed” back on time.
As with credit builder loans, CD or Passbook loans will be reported to the Big 3 financial agencies as well as helping to build your FICO score.
- Pay for Data Reports. If you have always been a renter and never owned a home, paid credit reporting might be a great alternative for you. It gives you the ability to have your nontraditional payment history compiled and then reported to the big credit bureaus like Experian and TransUnion. The reason for the third-party agency is that you can’t report this data on your own and will need help from a pay for data company like Rental Karma or Rent Reporters. While it may cost a little bit of money it’s a great way to get your excellent payment history (assuming that you have one) reported to the big credit agencies.
- Alternative Credit Scores. There are many other types of credit scores the on the traditional FICO score. Some take into account your utility payments, rental payments and a lot of other financial information that’s not regularly included in your FICO score. As a matter of fact, FICO actually has their own FICO Expansion Score, a score that uses checking account management and other nontraditional data to determine your credit score.
Since some lenders only look at your FICO score and others actually have their own scoring system, these alternative credit scores work better with some than with others. Some scores might still have value for you even if a lender might not see them. For example, an “educational score” will help you keep track of your progress, something that is always important when it comes to reaching any goals that you might set.
eCredable has such an educational score and, once you sign up and list all of your monthly bill information, they can turn that info, and your payment history, into a “score”. They can also take this data and, for a fee of between $20 and $30 per bill, provide verification of your on-time payments to credit agencies.
As you can see there are quite a few different ways that you can build credit without actually having a credit card. If you have any questions about credit, financial questions in general or just want to leave us a comment, please do and will get back to you with advice and information ASAP.