How to Build Good Credit Without Going Into a Stitch of Debt

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There’s a dangerous misconception floating around the world of consumer credit that you must be willing to go into debt to build good credit scores. Thankfully, this isn’t true.

The idea that debt and solid credit reports and credit scores go hand-in-hand is false. In fact, credit scoring models are designed to reward you when you have less, or no, debt. As such, if you’ve been nervous or hesitant to try to build or rebuild your credit because you don’t want to take on debt, you can relax. You don’t have to borrow a dime to accomplish that goal.

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There are even several extensions of credit or service that you can use to build or rebuild your credit where getting into debt is an option rather than a requirement.

Do Credit Cards Help Build Credit?

Despite what you may have heard, opening a credit card account isn’t synonymous with going into debt. In fact it’s entirely possible to use a credit card and remain completely debt-free, as long as you pay the balance in full each month.

If you have no credit or damaged credit, applying for a secured credit card that requires a deposit might be your best bet. However, if your credit is in decent shape, you will likely qualify for an unsecured credit card, which does not require a deposit.

The type of credit card account you open is less meaningful compared to how you manage the account. For a credit card to potentially help your credit scores, you need to do the following:

  • Make every monthly payment on time — no exceptions.
  • Keep your balance-to-credit-limit ratio low by paying off your account in full each month or by using the card modestly.
  • Don’t ever take advantage of the so-called “skip a payment this month” options because the balance will still accrue interest and your credit reports will indicate that your balance was not reduced at all that month.

What is a Credit Builder Loan?

A credit builder loan is another option that may help you build credit scores the debt-free way. Credit builder loans are offered by many credit unions and a few online lenders. When managed properly, the loans give you a way to build your credit and create a small savings account at the same time.

You need to make every payment on time for the new account to potentially help you build credit. There may also be some minimal costs involved in the form of interest and/or fees.

Credit builder loans are similar to personal loans, with a few exceptions. First, the loans are typically small, generally $500 to $1,000. Second, instead of giving you the funds immediately, the lender will generally hold the money in an interest-accruing savings account. So while you’re technically borrowing the money, it’s actually in an account to your benefit earning interest.
You’ll be asked to make monthly payments on the loan for a short, fixed period of time that is often six to 12 months. You need to make every payment on time for the new account to potentially help you build credit. There may also be some minimal costs involved in the form of interest and/or fees.

Once you make your final payment on the loan, the funds plus any interest earned will be released to you.

Does Paying Utilities Build Credit?

This is a new one, so pay attention please. Thanks to a new program offered by Experian called “Experian Boost,” millions of people may soon be able to improve their FICO and VantageScore credit scores by having their utility information added to their credit reports at Experian. The opt-in model allows you to give permission for Experian to access the bank account used to pay your utilities, gather information about your payments to your utility providers and have the information added to your Experian credit report.

Assuming you have maintained consistent, on-time payments, the additional data might improve your scores. Experian Boost isn’t available to consumers just yet. However, Experian states that it will be launching soon. If you’re interested, you can sign up for early access in advance.