How to Build Credit Without a Credit Card

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How to build credit without a credit card is easier than you might think! It’s not some crazy hack but rather a personal banking product that you can use to build or potentially repair credit. Dave Ramsey suggests that every single person should be able to pay off their debt, never borrow again, and have a zero credit score…that the ultimate goal is to have a zero credit score. So why would I be going against what Dave Ramsey says in needing a credit score? After all, I am a self-proclaimed free-spirited nerd! There are 3 different reasons why you would need a good credit score.

3 Reasons You Need a Good Credit Score

1. Employers Check Credit

So the #1 reason why you would need a good credit score is that potential employers check your credit prior to hiring you. They wanna make sure that you’re responsible, that you pay your bills on time, and that you don’t have any outstanding judgments or bankruptcies that may potentially reflect negatively on the company. An employee who is sloppy with their finances is likely sloppy with their work as well.  So employers check your credit. That’s very, very important to know. If you have a negative credit history, you wanna try to fix that. You wanna try to repair that. You can’t wipe the slate completely clean immediately. But you can at least take the steps necessary to try to make it look better than what it does today.

2. Auto Insurance Score

The second reason that you might need a credit score is that you have a car insurance score. The lower your credit score is, the higher your premiums could be. So it really can affect how much you have to pay for your car insurance if you have a zero credit score. The better your credit score, the better your insurance score and the better your premiums. I always suggest comparing rates with an insurance broker who can look at multiple companies and compare apples to apples. When obtaining rate quotes, a common practice is for an agent to try to lure you by lower premiums, only to find out later that you have less coverage than the other agent was quoting.

3. Credit Score Matters

The other reason why I suggest that you need to have a good FICO score is that phone, internet, utilities…all of those companies check your credit prior to giving you service. And a lot of times, they will charge you a deposit or an upfront fee just to make sure that you’re going to pay your bill. Our utility company in charges you a $300 deposit if you have poor credit. And they don’t give it back to you after a year or so of paying on time. This utility company holds onto that money until you move out of the area. So they’re earning interest on your money because you have poor credit.  There are no other options for utilities, so you’re out of options. You can’t shop around for utilities most of the time.  So it’s very important to just make sure that you have a good score. And guys, I’m not saying it’s okay to have debt. I’m not pro-credit card under any circumstances. But I do think that it is important to keep your score decent. Here’s how to do it.

How to Build Credit Without a Credit Card

Ok..so how do you build credit without a credit card? There’s a product in the banking industry that isn’t talked about much.  It’s called a CD-secured loan or a savings-secured loan.

Let’s say you have $1000 saved up in the bank, and you want to do something with it. If you deposit that $1000 into a CD, “a certificate of deposit” or a savings account, the bank can place a hold on those funds where you’re not able to access them. Then they can give you a loan for the exact same amount that they placed on hold, at which point you’d set up terms and you pay that loan back. And if your bank reports to credit bureaus (most of them do) you start showing a positive repayment history.

Now, this is without the use of a credit card. You don’t need credit cards to build credit! Let me say this again….you CAN build credit without a credit card! This is just a regular, secured loan (secured by your own money in the bank). A lot of times the bank doesn’t even check your credit report before they give you this loan because if you were to default, it’s secured by your own money. So they can take the money out of your CD and pay off the loan if you start to default and not pay payments. But I’m gonna tell you how to set it up to where you don’t even have to worry about it. It will be automatically paid every month, and your credit score is built without you even having to think another thing about it.

You can save 20% off all three bureaus at myFICO through my special offer. It’s always good to know where you stand so you can start improving your score. You also want to ensure that everything is in order and there are no errors on the credit reports.

 

So to recap, you get $1000, put it in the bank. The bank puts a hold on it. They give you a check for a thousand dollars. This is what I want you to do with that check. Deposit that check into another checking account, separate from your main account. This new account will be solely for paying payments on that loan. And you’ll have your banker set up automatic payments once a month on the due date from that checking account to the loan. So let’s say you have a $1000 loan for 12 months, and your payment is going to be $85 a month for 12 months.

You’re going to automatically have it set up to where on, let’s say the 15th of the month, that loan payment is paid automatically out of your checking account. You set it and forget it. It’s a way for you to build your credit or rebuild your credit. I love this product for young people…for high schoolers and college students. I love it because I’m not a fan as soon as you turn 18, Discover and Chase and Bank of America and all of the credit card companies are going to start sending you mail wanting you to sign up for their credit cards. And we don’t want that. The goal is not to do that.

I’ll tell you when I turned eighteen, the first thing I did was get a Walmart Credit Card. And guess where my first job when I graduated high school was…..WALMART. So I found myself buying everything at Walmart, and pretty soon…..I racked up the debt. I wrote all about it in a post about financial advice to my younger self here. So definitely consider trying to build your credit without the use of credit cards and using something like a CD-secured loan. Use your bank to your advantage. And you’ll quickly find out how to build your credit score from scratch in no time! It is possible to build your FICO without needing to worship the almighty VISA and MasterCard, and I highly recommend it for students and those who have a zero credit score.