Society today is more dependent on credit scores not just to make purchases and access loans but also as a crucial tool for critical decisions. A good credit score gives you a good name, which is said to be better than riches.
Therefore, itâs crucial to understand what is a good credit score? Why do we need to build good credit? And, how to build credit without a credit card.
A credit score is a three-digit number, often ranging between 300 and 900, thatâs used to express the creditworthiness of a person. It is based on a personâs credit history.
A higher score typically indicates that the individual is more likely to make payments on time. In other words, a credit score reflects how âfinancially fitâ a person is.
Your credit score today will determine how well you can navigate through society. It will determine where you live and how much you pay for your home; your monthly bills; what you drive and how much you pay for its upkeep; your chances of landing a job or climbing through the ladders of your career and your ability to start a business.
Hereâs a little more on how your credit score influences your lifestyle.
Having your own home is an American dream. But before you can secure a mortgage, lenders want to be certain that you will not default.
Therefore, they rely on your credit score to make the decision whether to advance the facility or not. Also, lenders use the score to determine how much to advance you and to set the interest rate.
What if you want to be a renter for life? Renters too cannot escape credit score as landlords use credit score to determine how likely you are to default on rent.
Your credit score also affects your monthly utility bills such as electricity, cable and phone bills. The utility service provider, like the landlord, considers to have advanced you one month of service and regards your credit score as a good indicator of how likely you are to default.
A good and reliable car often comes at a high price. Most people cannot afford to purchase a car by cash, therefore, we rely on car loans.
The value of a car loan (determines what you drive) and the interest rate on the car loan is directly determined by your credit score. Moreover, insurers also use credit scores to determine your premium rates.
According to auto insurance analyst company, Thezebra.com, insurers have been using credit scores for over two decades to set your monthly premium rates.
Prospective employers often check the credit reports of shortlisted job applicants to examine their financial prudence. Also, an employer can call on the same information to determine whether to promote you to a position with more financial responsibility.
If you are an entrepreneur, your credit score is crucial as it determines whether you can access start-up capital, whether you qualify for certain tenders and your relationship with suppliers.
Clearly, your credit score is crucial to navigating through life. If you are struggling with a poor credit score, you can seek ways to get approved with bad credit, but the best way is to fix your credit.
Also, we often associate credit scores with credit cards. Radio personality and comedian, Adam Carolla, said, âWe donât realize how crucial the credit card is, not just to make purchases but also to navigate through society.âÂ The plastic card has almost become synonymous with credit scores and wealth building.
But, you can build an excellent credit history, and get rich without the plastic card.
Mark Cuban, the billionaire businessman and host of Shark Tank TV show is famously quoted for saying âIf you use a credit card, you donât want to be rich.â
Most Americans carry some form of debt. According to a report by CNBC on a study conducted by the Northwestern Mutual in their 2018 planning, the average American is indebted to the tune of $ 38,000.
If you are debt free, then you are in a very small club.
According to the report, for generation Z and younger millennials, the more prominent debts are student loans. Older millennials, or generation X are grappling with mortgages and credit card balances and most baby boomers, like the gen X, have mortgages and credit card balances.
Fortunately, your credit report captures how you make all your debt repayments, not just credit card payments. In fact, most credit scores consider revolving loans such as credit cards as a small constituent of calculating the overall credit score.Â The important aspect is your repayment history.
Therefore, if you feel like the student loan has been a yoke over your neck for so long, continue making on-time payments and look on the bright side, at least itâll help you build a good credit score.
Many people believe that their utility payments reflect and contribute to their credit scores. However, that is not so. In fact, even your solid rent payments will not show up or contribute to your credit scores. Your monthly repayments will contribute to your credit score only if you have a mortgage or choose to report them.
If you are among the 43 million American renters, and you would like to keep your credit file âslim,â you can take steps to include your faithful monthly rent payments in your report. It is an excellent way to build your credit without using credit cards.
You can get in touch with third-party rent tracking companies like RentReporters.com, and for a fee, often not exceeding $ 100 per year, theyâll verify that you are making on-time rent payments and report the positive payments to credit bureaus.
Some renters have seen their scores get a 29 point boost by doing this.
So, if you are loan-averse, you can build your credit score using something you are already making payments for.
You could be a Mark Cuban fan and youâd want to avoid credit cards like the plague. But the odds are that youâll need some kind of loan to achieve certain milestones in life. Perhaps a mortgage or a student loan is what youâll need.
If you are fresh on a new job an auto loan, or a personal loan could be just what you need to get you started in your profession.
You can reach out to firms like BestEgg, Freedom Plus, Lendvious, Prosper or Lending Tree and work how to build your credit even without a credit card. If you are in business, the same firms can help you land a peer-to-peer loan to navigate through business.
All loans have an impact on your credit, but not all loans have an equal impact. Some loans look better on your report and enable you to build credit better than others.
Long-term secured loans, such as mortgage loans, as well as student loans,Â look better on you than revolving loans such as credit cards or unsecured facilities such as personal loans or payday loans.
The bottom line, however, when it comes to building your credit, rests on how well you repay your loans. You can build a rock-solid credit history through dependable and on-time loan repayment habits regardless of the loan type.
Just keep in mind that whatever debt it is, youâve got to stick to the repayment schedule,Â ensure that you donât exhaust your credit line, and endeavor to sustain it for as long as it makes economic sense.
If you still have cold feet regarding debt, you can take a credit builder loan or a secured credit card.
Credit builder loans and secured credit cards are not the typical loans or credit card facilities available in the market. They are specialized products designed to help those who are debt averse to build credit or people with bad credit, to repair credit.
Whereas traditional debt facilities lend you cash in advance, credit builder loans work in the opposite direction. You agree with the bank, or credit union to remit predetermined regular payments to an account, for a certain period. After the period matures, âhaving paid off the principal and interest, âthe bank pays you money for the loan.
In the same way, secured credit cards require the cardholder to make a deposit with the credit card company, which is equivalent to the credit card limit.
However, each payment you charge to the credit card is not deducted from the existing deposit. Instead, you make a credit card bill payment just as you would on a normal credit card.
Hereâs the catch.
For both credit builder and secured card loans, the Card Company, bank or credit union advancing the âloan,â reports each repayment as it would report a regular loan facility.
This way, you get to build your credit without a credit card and without accumulating debt.
Take advantage of someone elseâs good credit history.
You can still build credit without a credit card by piggy riding off someoneâs excellent score. This happens when you get co-opted as an authorized user on another personâs credit card.
It could be your parent, your close friend or even your spouse that you get to relish in their good behavior and excellent scores.
Nevertheless, the credit report will indicate that the account is shared and you also risk a dip in your credit score should the primary account holder default.
Lastly, you can build credit by scrutinizing the credit report and disputing any errors.
Statistics show that nearly all Americans have had an encounter with debt. In fact, the debt-free club is a very small club, and people often donât last.
What do you look out for in your credit report?
Look out for false accounts, and the accuracy of information contained therein. According to Javelin Strategy and Research, in 2017, Americans were hit by 16.7 million identity theft cases. Worse still, the 2018 report showed that the criminals were getting more complicated.
Chances are that your credit report could contain several false accounts or erroneous information. But you donât have to carry it along.
A report by the Federal Trade Commission indicated four out of five people who identified genuine errors in their credit reports had their scores adjusted positively. So have a second look at that report.
In conclusion, credit cards offer several benefits and lifestyle options. They are a good way to build credit. However, if you are credit card averse, these options will give insights on ways to build credit without credit cards.