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I have some thoughts on credit that need to get out of my head, following the weird popularity of the last credit card post I wrote.
Soooo… recently I wrote this post about how to get approved for a rewards credit card on a “low income”… and I have to be honest, I seriously hesitated to write it. Allow me to ramble here for a moment, before I get where I’m going. (Feel free to skip ahead if you just want the suggestions about how to improve your credit without a credit card. 😉 )
I felt like my last post might be bad advice for some people. But I wrote it anyway, because it’s not bad advice for everyone. It’s awesome advice for the people who have good credit and want to benefit from rewards credit cards but can’t because of their (low) income.
I suppose a not unrealistic train of thought is that if you have a low income you don’t have very much money, and therefore credit could be dangerous to you. Many of the worlds most popular financial advisers would probably tell (people with a low income) to cut up their credit cards and never look back.
But you can’t put everyone in the same box! I don’t make a lot of money, but I do not have money problems. End of story. I have zero debt and more credit in my name than what I make in two years. I don’t consider credit “money” that is available to me, I think of it as a tool – and that’s it.
We flew to Hawaii for free this year with our credit cards rewards, and used the airport lounge for free on our trip thanks to the same card (Travel hacking. Yes). Last year I bought all my bedding plants with a rebate and I’ve saved nearly 100 bucks on groceries this year thanks to rewards cards.
If you have a great credit score and no debt and you aren’t at risk of losing all your good sense just because you get a credit card, then why shouldn’t you benefit from a rewards card?
If you don’t have good credit and don’t trust yourself with a card yet (or flat out can’t get one), but really want to start moving in the right direction – good news! There’s steps you can take to do that 🙂 First of all, If you have no idea what kind of credit you have, you can get your credit score for free from Credit Sesame. It’s always a good idea to understand where you’re starting!
Before credit, you need stability
But – before you can worry about your credit – you gotta get your finances in order. This really isn’t a post about how to do that. That is a process… and it might take you a while. Figure out what you need to do and do it.
Learn to use the money you have. Budgeting works for lots of people, and paying off debt is crucial. There are at least 4,781 blog posts from people who paid off heaps of debt in a relatively short time. They have good advice for you. The only thing I could add to anything they have to say is this: learn to want less. Less house, less car, less phone, less stuff. Less stuff = more money.
OK. Time for basic credit 101.
A crash course on how credit is built
Just to start, the whole point of a credit rating is to allow lenders to determine how likely you are to re-pay borrowed money. 850 is the maximum score, as in, 850 people out of 850 people with a rating of 850 will repay their debts. According to fivecentnickle.com “once you get down near 600 you’re pretty much screwed when it comes to securing credit”.
So what contributes to a credit score? Understanding this is important when learning how to improve your credit without a credit card.
Payment history on any money you owe (phone, car loan, mortgage, electricity, water, gas, cable, credit card, bank loan, student loan ect) is a pretty big part of the whole picture. Payment history gives lenders an idea of how reliable you are, and how likely you are to either pay… or not pay. In fact this is the biggest contributing factor to your credit score.
Next up is how much you currently owe. Obviously if you are already in huge debit, there’s a chance that there is a reason you are in huge debt. Whatever that reason is, it means you might be less likely to repay your debts.
Length of credit history is the third determining factor, although it does account for less than the first two. If you have been making on time payments and using your available credit consistently for a long time, this will positively affect your score. On the flip side, if you have a very short credit history your score might not be very strong yet. This is only because there isn’t enough information for the credit bureau to make an informed decision.
Lasty, types of credit used and new credit applications also affect your credit score. These things are not huge defining factors, but if you are applying for credit all the time, it can look bad, like perhaps you are desperate for credit.
SO, taking these things into consideration, there are some ways you can improve your credit without a credit card. (Even thought a credit card is one of the easiest ways).
Ways you can improve your credit without a credit card
(My husband moved to my country so we could be together, and he left all his good credit in England. Major bummer. We had to build him a credit score from scratch here. It wasn’t that hard, and it only took a couple years to get him a golden one. He DID use a small limit free credit card in addition to the ideas below.)
→ Pay the bills you have on time, every time. If all you have is a student loan and phone bill, that’ll still work in your favor. If remembering to pay bills on time is hard for you, set up direct debit from your bank account.
→ If you happen to miss a bill payment by a few days, but you’re USUALLY really prompt, phone them and apologize, and ask them to wipe it from your history. Yes, you can actually do this. I’ve done it twice, once when I paid the wrong credit card, once when our mail was stolen. You can’t make a habit of this.
→ Apply for a small line of credit at a bank, and then hardly use it. The key is hardly using it. You have to use it regularly to get a history, but you should pay it off often, and keep your balance low. Maybe buy a tank of gas or all your groceries with it, and pay it off within a week or two of using it. (Which, incidentally, is what you should do with a credit card also if you do get one.)
→ If you have really ugly credit history but are on the right track now, one of the only ways to prove that you’re on the right track might be to apply for a secured loan. This is where you give the bank say, $2000.00. Then they give YOU $2000.00. Then you pay them $2000.00 plus interest over the next X amount of months. If you miss payments, they just cover them with the money you gave them upfront, so they aren’t out anything. (But you will be out good credit!) Talk about an exercise in futility! Or at least it feels like that… but it’s worth it in the end. You’ll have a chance to show the bank that they can trust you. Plus, bonus, you are forced to save $2000.00. When the loan is all paid off, they give you your money back.
Anyone else out there had success building their credit without a credit card? I’d love to hear further suggestions – I’m always trying to learn more about it 🙂