Using a credit card—responsibly—is the most common way to build up your credit history and boost your credit score. But if you’re wary of hitting the plastic, we hear you. After all, plenty of people struggle to keep credit card debt under control. As of the second quarter of 2019, Americans have racked up a whopping $868 billion of total credit-card debt, an increase of $39 billion from the year before. Of those balances, 5.17 percent have entered delinquency, meaning that payments on them have become 90 days or more past due, according to the Federal Reserve Bank of New York—a figure that’s been on the rise since 2017.
If you fear becoming a credit card delinquent yourself and would rather avoid the risk, you can still work on establishing a solid credit history and top credit score. Here are five strategies to consider:
Focus on repaying your student loan.
Unfortunately, odds are you’re carrying some student loan debt. About two out of every three college grads from the class of 2017 does, according to the Institute for College Access and Success. And those borrowers owe $28,650, on average.
The thin silver lining to that cloud of debt: Repaying your student loan counts on your credit report. So if you make all those payments as scheduled, your credit score should benefit. If you have any other type of debt, such as an auto loan or personal loan, making those payments, in full and on time, can help you establish and boost your credit score, too.
Note though that your credit mix, i.e. the different types of debt you carry, is factored into your credit score. Student, auto and personal loans are typically classified as installment loans. So only carrying this kind of debt wouldn’t help increase your credit mix score. Using a credit card, which is considered a revolving loan, would help mix up your credit. Then again, credit mix only accounts for 10 percent of your FICO score—by comparison, payment history (i.e. making payments on time) counts for 35 percent of your score—so you have to decide whether it’s worth worrying about.
Try a credit-builder loan.
Just as the name implies, a credit-builder loan is a financial tool designed specifically to help people with no or bad credit build (or rebuild) their credit and scores.
Here’s how it works: You borrow a small amount, maybe $300 to $1,000, from a bank, credit union or other lender. They put that money into a savings or other account—that you cannot access. You make payments as scheduled, and the lender reports that to the credit bureaus. If you pay on time and in full, your score gets a boost. But if you miss payments or pay late, it hurts your score. Once you repay the full balance, plus interest, then you get the money. So it’s kind of like a loan with training wheels: You get a little practice and the opportunity to build up your confidence and abilities, but you’re not quite off to the races.
Downside: Just like any other loan or debt, you can expect to pay fees and interest. And, remember, you don’t actually get access to that money until you’ve paid off the loan. It’s not a traditional loan—more like a forced savings plan with the opportunity to earn a little interest and to build some good habits. Be sure to look at the interest and fees you’ll pay and any interest you might earn in the account as you evaluate lenders.
Become an authorized user.
Another way to a higher credit score is on somebody else’s coattails, or credit card, as it were. If somebody you know and trust adds you to his or her credit card account as an authorized user, you can benefit from the card’s activity without even using it yourself. Its usage would be reported to the credit bureaus, recorded to your credit history and factored into your score, but the primary user would still be the one ultimately responsible for the debt.
This strategy works best for those just getting started with credit, as opposed to those trying to rebuild bad credit, because it would only be one story in your credit report. And of course, if the story goes bad, i.e. if the primary user overspends or misses payments, your credit suffers along with it.
Report your rent.
Paying your rent doesn’t usually go on your credit report—but it can. You can ask your landlords if they report rental payments to the credit bureaus. If not, you can use a service, such as PayYourRent, RentTrack or RentReporters, to do it for you. You pay a registration fee and monthly charges, and the company reports your rent-paying activity to the credit bureaus. (The services may also offer other benefits, like the ability to pay rent automatically and electronically or send and track maintenance requests to your landlord. But you should weigh that against the fees you’ll be paying.)
Again, whether this helps or hurts your credit score depends on you. If you always pay your rent on time, that’s great. But if you miss a payment here and there, your score will suffer.
Consider a secured card.
Yes, a secured credit card is still a credit card. But it lacks the big risk you’re probably most afraid of when it comes to using a credit card: the ability to overspend. The way it works is you put in a deposit, say $200 to $1,000, and that’s usually your credit limit. So you can’t really go on some crazy shopping spree with a secured card.
Besides that, these cards work pretty much the same way traditional credit cards do. The lenders report your activity to the credit bureaus, so paying your balance in full and on time adds to your credit score. If you carry a balance, you incur interest, typically at higher rates than unsecured cards. You also have to watch out for annual membership fees and other charges. But on the bright side, if you leave your card in good standing, you get your deposit back.
All of these strategies can work well to help you build your credit, as well as develop good financial habits. But whenever you feel ready, you may still want to consider signing up for a traditional credit card. Once you’re able to handle one responsibly, you can not only boost your credit score, you can also snag discounts and earn rewards.
In the meantime, it’s smart to not take on more debt than you can manage. And now you know, skipping the plastic does not have to bar you from developing a solid credit history and building a fine financial foundation.