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Although I am not a huge fan of credit cards, I do believe in having credit.
There are so many things in life nowadays that require you to have a good credit score–your cell phone company, renting a house or apartment, sometimes even finding a job.
So even though I do not want you to build your credit score in order to go get a new car loan for example, a good credit score is something that will make your life easier for other things.
I suggest you stay far away from credit cards–especially if you have never had one before. You can read about my $6,000 mistake here, or just take my word for it. Credit cards can be a very sneaky trap you can easily fall into, and get in way over your head before you even realize it.
So how on earth do you build up your credit and get a good credit score without a credit card?
Build Your Credit the Easy Way
Savings secured loans.
While this is still technically a loan, the way a savings secured loan works is you have to have a certain amount of money built up in your savings account, and then you take out a loan for the same amount in your account. So if you have $750 saved up in your account, you can take out a loan for $750. The bank will put a hold on the money in your savings account so you can’t touch it until you pay the loan off.
This is a great way to build your credit score, as it is no risk to the bank and no risk to you. I would even suggest using the money you received from the loan to pay the loan back (just don’t pay it off early–that will defeat the purpose.) You need to have the loan for at least 6 months or longer, that way you can establish a record of good payment history.
Once you pay the loan off, start back over with a new one. I would do this as many times as the bank allows (which is probably as many times as you want.) It’s a great way for the bank to build relationships and keep your business; It’s a great way for you to build credit.
You may be wondering, won’t I have to pay interest? And the answer is yes, you will–but the amount you’ll pay is so small, it won’t hurt too much. You’ll probably pay somewhere around 2% interest–pennies compared to the 24% interest rate range of a credit card. 2% of $750 for example is only $15. And that is annually, so if you pay it off in only 6 months, you’ll pay even less in interest.
Find a Bank
One word of caution–not all banks offer savings secured loans. Larger nationwide or global banks such as Chase or Wells Fargo may not offer smaller loans like this, mainly because banks don’t really make any money off these types of loans.
But if you have a community bank in your area, you should be able to find a savings secured loan easy. I almost always recommend a community bank over a bigger bank anyway–you’ll usually end up paying less (or no!) fees, the person in front of you will usually be the one to help you, and it’s just easier to build a good banking relationship with them since they don’t have millions of other customers.
A Few Last Tips
You can check your credit score for free on sites like CreditKarma.com. If you are just starting out and want to build up your credit, in my opinion this is the best way to go.
Parents, if you’re thinking of getting a credit card for your teenage son or daughter, please try a savings secured loan instead. While I know you have good intentions for that credit card, most of the time they do more harm than good. Credit card companies like to market to teenagers and young adults because they know they do not have experience with credit cards yet, and will likely rack up the card and carry a balance month to month, thus earning the credit card company more money in interest charges.
Building your credit without a credit card is possible. A savings secured loan is a great way to start building your credit and building a relationship with your bank.
Do you have any other tips to add on building your credit? Let me know in the comments below!