How to Build Credit Score Without Going into Debt
Smart Ways You Can Use to Build Credit Score
You can’t have credit score except you are into debt. Probably that is what you have been advised on how to build credit score. Well, this may be correct to a certain extent but that is not the absolute truth. The truth is that you don’t necessarily need to be in debt in order to have good credit score. If you are the type that doesn’t like debt like me, there are still ways you can avoid going into debts while you still achieve your aim of having good credit score.
It is quite unfortunate that even though you have enough cash in your savings account which allows you to use debit card to make payments any time you buy something, it will still not help you build your credit score. When you compare your debit card with credit cards, you will observe that the two cards are both plastic and they look almost the same. You can use your debit card to make payment the same way you will use your credit card to make payment. The only difference is that, when you use your debit card to make payment, you are spending your own money. And you cannot spend beyond what you have in your account. Because you are spending your own money, your bank will not report your spending or balance to the credit bureaus. On the other hand, when you use credit card to make payments, you are not spending your money. You are spending borrowed money as made available to you by your card issuer up to the maximum of your approved credit limit. Since you are spending borrowed money, this is regarded as credit and it will be reported to the credit bureaus. That is why you can build your credit score with credit card.
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So, let’s go back to our topic that you don’t need debts to build your credit score. I will show you how you can achieve this.
Get a Secured Credit Card: Secured credit card is different from regular credit cards. If you want to get a secured credit card, you will need to make a deposit with the card issuer. Once you have made the deposit, a secured credit card will be issued to you up to the limit of the amount you deposited. Your deposit will be used as collateral and no interest will accrue on the amount. If you default in paying back your secured card balance, the card issuer will fall back on your deposit to recover your card balance. Technically, one can say you are spending your own money. But the difference here is that secured credit card balance is reported to the credit bureaus and you will need to pay back the card balance. People who can’t get regular credit cards can resort to getting secured credit card so that they can use it to build their credit. Over a period of time say like one to two years, your secured credit card may be converted to regular credit card if you have been paying your card balance promptly. This means that your initial deposit will be refunded to you. If you are getting secured credit card, you still need to ensure that you use it responsibly. You should use it to build good credit history by ensuring that you pay your card balance promptly. Also, you should only use a small portion of your credit limit. It is suggested that you keep your credit utilization below 30%.
Be an authorized User: You can be an authorized user of another person’s credit card. However, you need to be sure that the person has good credit history and the person is committed to using his card responsibly. As long as the person continues to use his credit card responsibly, it will equally impact your own credit score possibly. You can only become an authorized user of a credit card of a person that actually trust you. What you do with the card will not only affect your credit score, it will affect the other person too.
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Carry small balance: You can decide to get your own credit card. Holding a credit card does not mean that you need to carry debt. When you use your credit card to make payment, you should ensure that your pay off almost the entire card balance before the statement date. You may need to find out your billing cycle from your credit card issuer. Leaving just a small amount as your card balance at the end of the month will allow the card issuer to report the debt to the credit bureaus. This amount can even be as low as $100. The most important thing is for you to ensure that you pay the amount within twenty one days after your statement date. Credit bureaus are more interested in your payment history. They want to see how you have been faithful in paying back your debt.
With the three simple methods discussed above, you must have come to the realization that you don’t need to enter into debts before you build your credit score. You just need to be smart about it.