When you begin investigating common ways to build better credit, one of the first suggestions you will likely come across is the concept of opening credit card accounts in an effort to begin establishing a positive credit history. However, many consumers (especially young adults) are often afraid of opening a credit card because of the potential for credit card debt. The truth of the matter is that credit cards are simply a tool and potentially a powerful tool to help you build better credit as long as the accounts are managed properly.
Although opening credit cards likely represents the most common method of building credit, if you are still completely averse to opening a credit card account the good news is that they are not your only option. There are still some more unorthodox means available to you so that you can start building positive credit without the need to ever fill out a credit card application.
Credit Builder Loans
One of the most effective ways to build or rebuild your credit independent of a credit card account is to apply for a credit builder loan. A credit builder loan is a product offered by many credit unions, and is designed to give their members the opportunity to establish some positive credit history. In some ways credit builder loans are very similar to traditional personal loans. However, credit builder loans are generally small dollar installment loans, issued for around $500-$1,000, which typically must be paid back to the credit union within 12 months or less.
In addition to the smaller loan amounts and short payback schedules, credit builder loans also differ from traditional personal loans in another way. When you are approved for a credit builder loan you do not actually receive the borrowed funds like you would with normal personal loans. Instead the funds issued to you as part of a credit builder loan will be held by the lender in an interest-bearing savings account. You will make monthly payments, but the funds will not be released to you until you have repaid the loan amount plus any fees and interest in full. As you can see, there is little risk on behalf of the credit union in issuing a credit builder loan and, therefore, your application for the product is highly likely to be approved even if you have no credit or credit problems from the past. As long as the credit union reports your payment history to the three credit reporting agencies you’ll realize credit building benefits.
Authorized User Accounts
Another lesser known method of building credit involves the authorized user account. Technically the authorized user strategy does involve a credit card account, however it does not require you to open a credit card account of your own. If you have a loved one who already has an established credit card then you can ask if he or she would be willing to add you as an authorized user on the account. When you are added as an authorized user on a credit card the account information will typically (though not always) show up on your credit reports within a matter of a few months. Keep in mind, it is best to be added as an authorized user on a credit card account that is old, paid off monthly, and has never been paid late if you want to get maximum credit building benefit.
Student Loans
Taking out a student loan solely as a means to build or establish credit is probably not a great idea. In fact, taking on debt for the sole purpose of building or rebuilding your credit. However, if you find student loans to be a necessary means of financing your education then the truth is that these types of accounts can also potentially help you to build better credit. Remember, as is the case with any other credit obligation, it is important to always keep your student loans current and paid by the due date otherwise these accounts could have a negative impact upon your credit scores instead of a positive one.
