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Credit cards can be a valuable tool for building your credit and managing your finances. They aren't, however, the best credit-building tool for everyone, as they can lead to overspending.
Fortunately, it's not necessary to carry a bunch of credit cards as a way to build credit. In fact, you can build credit even if you don't have a single credit card account—then you can decide down the line whether adding a credit card could benefit you.
Follow these steps to build or rebuild credit without loading up on traditional credit cards.
1. Look Into a Credit-Builder Loan
A credit-builder loan can help you build or rebuild your credit without using a credit card.
This kind of loan doesn't work like a regular loan, it works more like a savings account. When you take out a credit-builder loan, the amount you "borrow" is put into an account you can't access. Your monthly payments toward the loan are then deposited into a savings account, the balance of which will be returned to you (sometimes with accrued interest) when you pay off the loan as agreed.
Credit-builder loans generally range from $300 to $1,000. During the loan term, normally six to 24 months, you'll make payments toward the loan balance.
The lender reports your loan payments to the national credit bureaus (Experian, TransUnion and Equifax), helping you build or improve your credit history. You can seek a credit-builder loan from a credit union, bank or online lender.
2. Make On-Time Payments
Just as it's important to be on time for a work shift or a doctor's appointment, it's also important to be on time with your payments.
Payment history is the No. 1 factor in calculating your credit score. Just one payment made more than 30 days late will likely cause your credit score to drop. Lenders, such as mortgage providers and credit card issuers, examine your payment history to determine whether to approve your application and how much credit you deserve.
Your payment history makes up 35% of your FICO® Score☉ , the credit score used by most lenders. Other than credit card bills, payments for credit products like personal loans, auto loans and mortgages go into figuring your FICO® Score.
3. Become an Authorized User
Becoming an authorized user on someone else's (usually a family member's) account can be another avenue for building or rebuilding your credit.
So, what is an authorized user? It's a secondary account holder for a credit card. As an authorized user, you can make purchases with the card (if the primary account holder agrees), but the primary account holder is responsible for paying the bills.
If you're an authorized user, you might get your own credit card or account number. But the primary user controls the account, exercising the power to monitor purchases and make payments. If you're trying to build credit without a credit card, you might not even want your own card.
How does becoming an authorized user benefit your credit? When you're added as an authorized user, the credit card issuer typically reports the account to the credit bureaus and it becomes part of your credit report (make sure this is the case with the card you are considering). Then you can enjoy the positive characteristics of that account, such as a solid payment history or the length of time that the account has been open.
For this arrangement to work to your advantage, though, the credit card issuer must report the authorized-user activity to the credit bureaus and your credit score must include this activity in its scoring formula—neither of these are givens. Still, being an authorized user may give you an edge in building or rebuilding your credit.
Before you sign up as an authorized user, make sure you're aware of how the primary user handles credit. If they start to miss payments, the authorized user account can be removed from your credit report.
4. Try Improving Credit With Experian Boost™†
Experian Boost is a tool that can help improve your credit scores by reporting utility and phone bill payments to the credit bureaus, which wasn't previously possible.
Experian Boost works by linking to your bank accounts to find qualifying on-time bill payments and, with your permission, to add those payments to your credit file. By using this tool, it's possible to see an instant lift in your credit scores.
5. Consider a Secured Credit Card
A secured credit card enables you to build credit if you have bad credit, or if you have little or no credit history. For instance, it might help you if you have a bankruptcy or a series of late payments on your credit report.
To get a secured credit card, you must deposit a certain amount of cash, often $50 to $300. The card issuer then extends a credit line to you usually in the same amount as the deposit. This differs from an unsecured credit card, which doesn't require you to deposit money as collateral.
In most cases, the card issuer will report your secured card account to the credit bureaus, enabling you to build or improve your credit history. If you want to apply for a secured credit card, make sure this is the case since not all issuers report secured card accounts. Making on-time payments every month will demonstrate responsible credit use, and some issuers will even transition you to an traditional unsecured card once you've made a certain number of on-time payments or kept your account in good standing.
Keep Track of Your Credit
Regularly monitoring your credit delivers several benefits, such as:
- Making it easier to spot changes in your credit report, especially those that might hurt your ability to qualify for credit cards and other financial products. For instance, you might notice a credit card payment that was reported as late when it actually was on time.
- Staying on top of your spending. For instance, you can see how much your credit credit balances have gone up or down and then adjust your spending.
- Seeing where your credit scores stand. This gives insights into whether you'll qualify for a loan, for example, or whether you might need to take action to bump up your scores.
The Bottom Line
Building or rebuilding your credit might seem tough to do without being the primary holder of a credit card account. But you've got a number of options that can lead to better financial health and more financial freedom. Embracing even just one of these options can pay off handsomely, setting you up for long-term credit success.