Credit scores are required to qualify for a car loan or mortgage. And the way to establish a credit history is by getting a credit card, right? This is a family myth of personal finance that has led millions of Americans to get their first credit card and risk falling into high-interest debt, experts say.
The average American in 2017 had credit cards issued by two banks and had a debt of $ 5,551, according to the credit bureau Experian. Collectively, Americans have $ 1 trillion in credit card debt, more than any country in the world.
Here are four ways consumers can create a credit history without falling into the credit card trap.
Report monthly bills such as rent and utilities
Bills like rent and utilities are not traditionally used to create a credit history, only loans. But new businesses and scoring models are emerging that include monthly bills like rent, said Robert Harrow, a credit card specialist at ValuePenguin. These bills include rent, cell phone, internet, utilities, and medical bills.
While these new models are not common, about 26 million people (or 11 percent of the U.S. adult population) do not have the type of credit that is traditionally used to create a credit score. This has led companies to look for ways to reach this “invisible credit” population, he said.
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One such company is ECredable, a credit bureau that uses data not traditionally used by the large credit bureaus of Experian, TransUnion and Equifax. Instead, ECredable relies on information such as rent and cell phone bills to create its own credit score for consumers.
“We wanted to help consumers and small business owners demonstrate their creditworthiness so they could apply for loans,” said Steve Ely, the company’s chief executive. “The credit card is the easiest way to generate credit, but far from the only way.”
Companies like Churchill Mortgage will give home loans to people with no credit history, said Erik Spencer, a senior loan officer at the company. Churchill uses alternative information, such as one-time rent and utility payments, to establish a credit history.
“This allows consumers who don’t have a credit score to get a mortgage,” Spencer said. “It’s not for people with bad credit who have a lot of late payments. It’s for people with little or no credit.”
Get a secured credit card issued by a bank
With a traditional credit card, the consumer gets a loan from a lender and pays interest on the money he lent. With a secured credit cardthe consumer uses their own money to finance the credit card and this becomes the line of credit for the account.
The lender then informs the credit bureau that the consumer is paying the secured card on time. But consumers need to watch out for rates when using a secure card.
Get someone else’s loan or credit card
This is an especially popular way to generate credit for young adults or even spouses. The person without credit is called the credit card or automatic loan of someone with established credit. This creates a history for the person without credit.
“This can be extremely risky for the credit holder if the other person gets into debt or doesn’t pay on time,” Harrow said. “But it can be a useful way to generate credit for those who don’t have it.”
Join a credit union to get a fresh start loan
The initial loan works in a similar way to a secured credit card, but because they are issued by a credit union, the fees are usually less expensive. The consumer deposits money in the credit union and uses and returns the money to establish the credit.
So it’s possible to live without a credit card, Spencer said. And for hotel reservations and rental cars, consumers can use the debit card attached to their checking or savings account, he said.
“You have all these myths floating around like,‘ I have to get a credit card as fast as I can because this starts my financial life, ’” Spencer said. I found nothing I can’t do with a debit card. “
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