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Establish or Rebuild Bad Credit Report Scores Without Credit Cards
Credit cards are usually the best way to rebuild credit or establish credit, but not everyone can qualify for an unsecured credit card that reports to the credit bureaus. These bad credit people should consider all options. Two ways to improve credit are by using a Revolving Account or Installment Loan. A revolving account is using credit cards that allows you to build up and pay down debt or using installment loans like mortgages, auto loans, or other debt that is repaid in installments.
With the economy and credit being tight, some consumers either can't get credit cards or simply don't want the temptation of using them. Those who don't want to use credit cards may choose not to because they feel they may overspend or they just don't want to trust credit card companies. Yet they don't have to give up on having great credit scores just to get a good rate on a mortgage loan, other loan, or getting approved at all. Having good credit is important even for thosewho don't plan on borrowing. Cell phone companies, landords, insurance companies, and employers often use credit information to evaluate applicants.
Consider these ways to build or improve credit without using credit cards:
1) Get a secured loan from a credit union. It may be called a share-secured loan and borrowing is backed by the money you put into a credit union savings account or certificate of deposit. The interest rate paid is typically a few percentage points above the rate earned on your money.
According to Susan Tiffany, director of consumer publications for the Credit Union National Association, these loans may be easier to get than bank loans, since credit unions are often willing to look at more than just your credit scores. She goes on to say that "Credit Unions don't treat credit scores as the only source of information about you, they're looking for ways to say yes. Are you responsible with your checking account? Are you demonstrating that you're trying to be a regular saver? Those behaviors can help." However, once these loans are paid off, creditors may stop building your scores.
The FICO credit-scoring formula is designed to predict people's risk of default, and it works best when people actively and responsibly use credit. A history of responsible credit use can get you ahead. It is much better to have an open account instead of having all accounts closed. Old loans may not help you at all, because they'll be dropped from your credit reports. When they are dropped depends on the lender and its policies. Some report closed accounts indefinitely or for 10 years, while others stop reporting them within months. Once a loan disappears from your credit reports, it stops helping your scores.
Consider these points:
* You don't have to pay a dime in interest if you use credit cards to build your scores. Just use them and pay them off on time and in full and you can improve your credit without paying finance charges.
* By refusing to use credit cards, you may have to stay in debt to build your scores.
Tips to Establish or Rebuild Credit:
1. Make sure loans are reported to all three major credit bureaus: Equifax, Experian and TransUnion. Some credit unions and smaller banks save money by reporting to only one. You want all three of your credit bureau reports to reflect the loan so that you get the benefit no matter which bureau is used by future lenders, insurance companies, landlords, or employers.
2. Consider person-to-person personal loans, either with family, friends, or online resources that connect borrowers with individual investors. The rates borrowers can get on three-year fixed rate loans depend on their credit and their applications. A loan can run anywhere from 7.8% to 26%. Investors "bid" on the borrowers' applications, with the investor willing to provide the lowest interest rate winning the contract. But these person-to-person personal loans are not worth squat if the lender doesn't report to at least one major credit bureau, whether Equifax, Experian or TransUnion.
3. Students, get a federal student loan. Federal student loans don't require credit checks, but you do need to be at least a half-time college student and to have submitted a Free Application for Federal Student Aid. You don't have to show financial need, and rates for unsubsidized federal Stafford loans are fixed at 6.8%. Loans may not show up on your credit reports until you're in repayment mode and on-time payments will help boost your scores.
4. Become an authorized user on someone else's card. When you're added as an authorized user to someone's credit card, their history with that card is typically imported to your credit reports. If the person is responsible with the card by making charges and paying on time, it could enhance your scores. If the other person messes up, that could hurt you, although you just need to be removed as authorized user for the bad stuff to disappear from your files. The other person doesn't need to give you access to the card to add you as an authorized user, but you should make sure the credit card will export the information to your credit reports. Some issuers report authorized-user information only for spouses or family members. The newest version of the leading FICO formula limits the number of authorized-user accounts that are counted. This was a step that was taken to discourage credit repair firms that were adding people to strangers' accounts.
5. Get or become a co-signer, as it can help you get a loan you might not otherwise get, and the loan can help build your credit scores. You can ask to be added as a co-signer to a responsible person's loan, and their payment history will be included in your files. Co-signing is risky for each party because it makes you equally responsible for the debt. If a payment is missed, it can ruin both parties' credit scores, and the effects can last for up to seven years. Unlike authorized-user status, which can easily be changed, you can't be removed from a co-signed debt, it must be paid off or refinanced before you're released from the obligation. If you're being added as a co-signer, you should be able to pay off the loan yourself and get online access to the account to make sure payments are made on time.
6. Put up your own money with a secured credit card. If you really don't like credit cards, this may not be a good option. If you want a card but can't get a regular account, this may be the way to go. Secured cards require that you make a deposit with the issuing bank, typically of $200 to $1,000. You usually get a credit limit equal to your deposit. There are fewer secured cards available these days, and many have higher credit standards than in the past. You can look for secured cards among the offerings aimed at people with limited or poor credit histories. Look for cards that report to all three major credit bureaus. Check the fees and avoid cards that charge more than $100 in setup and other initial fees.
7. Consider a Charge Card, if your credit history is already good and you want to keep it that way without using credit cards. These cards, provided by American Express and Diner's Club, don't normally allow you to carry a balance. You're supposed to pay off your bill in full every month, and you typically have no preset spending limit. Credit utilization measures how much of your available credit you're using. This ratio makes up 30% of your FICO score, so it's important. The more of a credit card limit you use, the bigger the potential dent on your score. Keep charges to 30% or less of your limit, even when you pay in full. But charge cards don't have traditional credit limits. So the latest versions of the FICO formula treat them differently from credit cards. Charge card balances aren't included in credit utilization formulas. Make sure you can pay them off when the bill arrives.
4 Last Options:
*Prepaid cards. Some prepaid cards promise to help you build your credit, but the fees charged are often high, and your activity may be reported to an "alternative" credit agency, rather than to the three bureaus that most lenders use. For example, the fee for Eufora's prepaid card Credit Builder is $139.75 to $219.95, and the card reports to just two of the three bureaus.
*Bad-credit credit cards. These unsecured cards tend to come with tiny credit limits and high upfront fees. A secured card is typically a better option if you're going to use plastic.
*Rent to own. You'll pay two to three times over for stuff you buy from one of these outfits, and your payments typically aren't reported to the three major credit bureaus.
*Other loans that aren't reported to the credit bureaus are loans from your retirement plan or life insurance policies. These won't help boost your scores because your payments aren't reported to the bureaus.
Bad credit scores can cause you to either be denied credit (application rejected), or can result in super high interest rates.
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