Updated: 1/21/2012 8:29 PM ET|
Build your credit without credit cards
5. Get (or be) a co-signer
Getting a co-signer can help you land a loan you might not otherwise get, and the loan can help build your credit scores. Or you can ask to be added as a co-signer to a responsible person's loan, and his or her payment history will be included in your files.
Co-signing is risky for each party because it makes you equally responsible for the debt. If a payment is missed, it can trash both parties' credit scores, and the effects can last for up to seven years. Unlike authorized-user status, which can easily be changed, you can't be removed from a co-signed debt -- it must be paid off or refinanced before you're released from the obligation.
If you're being added as a co-signer, you should be able to pay off the loan yourself and get online access to the account to make sure payments are made on time.
6. Put up your own money with a secured credit card
If you really don't like credit cards, you'll want to skip this option. If you want a card but can't get a regular account, however, this may be the way to go.
Secured cards require that you make a deposit with the issuing bank, typically of $200 to $1,000. You usually get a credit limit equal to your deposit.
There are fewer secured cards available these days, and many have higher credit standards than in the past. Index Credit Cards offers the most complete look at what's available, but you can look for secured cards among the offerings aimed at people with limited or poor credit histories at CardRatings.com, LowCards.com and CreditCards.com.
Look for cards that report to all three major credit bureaus. Check the fees; avoid cards that charge more than $100 in setup and other initial fees.
7. Charge it -- but not on a credit card
If your credit history is already good and you want to keep it that way without using credit cards, consider a charge card.
These cards, provided by American Express and Diner's Club, don't normally allow you to carry a balance. You're supposed to pay off your bill in full every month, and you typically have no preset spending limit.
There's a hidden benefit to using charge cards: You don't have to worry about credit utilization.
For credit-scoring newbies: Credit utilization measures how much of your available credit you're using. This ratio makes up 30% of your FICO score, so it's pretty important. The more of a credit card limit you use, the bigger the potential dent on your score, which is why you typically want to keep charges to 30% or less of your limit, even when you pay in full.
But charge cards don't have traditional credit limits. So the latest versions of the FICO formula treat them differently from credit cards. Charge card balances aren't included at all in credit utilization formulas, so you can run up big bills without fear -- as long as you can pay them off when the bill arrives.
"The newer models of the FICO separate out (charge cards) from credit cards," Paperno said. Balances on charge cards "aren't included in the revolving utilization calculations."
And 4 to avoid
You may be tempted by other ways to build your credit, but many have hidden traps or won't work. Methods you don't want to use include:
- Prepaid cards. Some prepaid cards promise to help you build your credit, but the fees charged are often high, and your activity may be reported to an "alternative" credit agency, rather than to the three bureaus that most lenders use.
- Bad-credit credit cards. These unsecured cards tend to come with tiny credit limits and high upfront fees. A secured card is typically a better option if you're going to use plastic.
- Rent to own. You'll pay two to three times over for stuff you buy from one of these outfits, and your payments typically aren't reported to the three major credit bureaus.
- Other loans that aren't reported to the credit bureaus. Loans from your retirement plan or life insurance policies won't help boost your scores because your payments aren't reported to the bureaus.
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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Good information, but just try to rent a car without a credit card. :-(
While some may think of credit cards as the evil empire, they do have benefits, the issue really is the ability to use credit wisely. One benefits of using a credit card is that your purchase is guaranteed to be what you bought and the other is having the ability to have available purchase power in case of an emergency. Some cards even insure the product past normal warrantees.
You can rent a car with a debit card, try Hertz.. Try to buy something over the internet, ok sometimes you can use e-checking or ACH.
Credit is based on your abilty and being responsible to pay a bill, not whether you have money in the bnak. Debit / check cards access your checking / saving accounts directly and do not reflect any bill paying.
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