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Build credit without using credit cards
Archive
BLOOMINGTON, Ind. – Marc Davenport applied for a credit card when he turned 18 two years ago. He wanted to establish good credit. He knew he would eventually need a loan, and wanted to be in a position for the best possible interest rate.
Now 20, Davenport, a nonstudent, is $3,000 in debt and owes money to four credit card companies. Enrolled as a sophomore at Indiana University-Purdue University at Indianapolis in the fall, Davenport took the spring semester off to work and pay his bills.
Davenport is an example of what can happen when trying to establish a good credit history. Establishing good credit helps people save money on interest rates for future loans, because it shows lenders their money is more likely to be repaid. While using a credit card can be helpful in establishing credit, it can be risky if one does not have the financial resources to pay the bill on time, said business school Lecturer in Management David Haeberle. Haeberle said establishing good credit without a credit card is the best way to go.
He explained several ways to build good credit and never open the Pandora’s box of credit cards:
-Put rent in your name
-Paying rent on time is a better way to build good credit history than using credit cards.
-A future lender wants to know that borrowers will make their payments on time. Living in a house or apartment involves a monthly payment. Whoever’s name is on the paperwork will benefit from the good credit history generated by timely payments.
-While being late on these payments is not a good idea, it is not as bad as putting off a credit card bill, which can charge more than 15 percent in annual interest.
-Pay bills on time
Credit card bills are not any more important or persuasive to a future lender than other kinds of bills. Phone bills, utility bills, cable bills, even Internet bills — it makes no difference. Payment of these bills and any other kinds of loans are reported to credit bureaus.
The important thing is that all these non-credit card bills carry much lower interest rates than credit card bills, so being late is not nearly as costly. These bills have advantages because they demonstrate to future lenders that paying for services in a timely fashion is important to the borrower.
For example, IU bills about 13,000 people statewide for student loans. About 20 percent of them have problems paying them back, said Barbara Bright, director of student loan administrations at IU. But the interest they have to pay is no more than 5 percent annually, Bright said.
Apply for a few credit cards, but don’t use them
Future lenders are not as interested in seeing borrowers pay back credit as they are in seeing that they did not abuse it.
“When they see you have been granted credit, that right there is enough to get a loan,” Haeberle said.
This means simply getting the credit card is good enough to impress lenders. But Haeberle said to be cautious.
“Applying for too many is dangerous,” Haeberle said. “When a company offering cards reviews your application and sees several previous applications, they see something is fishy and will refuse to grant you a card.”
This denial appears on credit reports and never vanishes. Being denied credit is worse than owing a debt.
Keep a healthy checking account and debit card
A debit card acts just like a credit card. The only difference with a debit card is money is immediately removed from the checking account. There is no worry about getting into debt, as long as there is money in the account.
“If you don’t bounce checks or go spend more than you have, that looks good to lenders,” Haeberle said.
Remember that establishing good credit is not as important as avoiding bad credit, Haeberle said. He said having no credit is a good thing, but once a student slides into bad credit, it can take a long time to climb out. Davenport is a good example.
“Eventually I couldn’t keep up with all the payments … I can’t even afford the 80 bucks a month between the four cards,” Davenport said. “It builds up really quickly.