How to Build Credit Without Going Into Debt


NEW YORK (MainStreet) — Credit scores are about more than just getting more credit. Increasingly, credit reports are used by landlords and even employers to decide if you're right for an apartment or a job. This makes it more crucial than ever to have a good credit score.

However, you don't get a good credit score automatically. On the contrary as noted by Mike Sullivan, chief education officer at nonprofit credit, housing and student loan counseling agency Take Charge America points out, most people start with "no file" or a "thin file." But how do you build a credit file that will help you get the job and apartment you want without going into debt?

Can You Build Credit Without Using Credit?

The short answer to the above question is "no." "You need to use credit to build credit," explains Sullivan. This doesn't necessarily need to be a credit card. It can also be a car note, housing mortgage or a personal loan. The trouble comes in when you're trying to build credit for the first time: all of these things are virtually impossible to get without some history of credit.

The best way to start building credit when you don't have any? "Get a secured credit card," says Sullivan. "It gets reported to credit bureaus in the same way as an unsecured card," he explains. This means that you can build credit without even risking going into debt: you can never spend more than you actually have.

Still, all secured cards are not created equally. Sullivan recommends that you go with a credit card associated with an established financial institution. In fact, wherever you do your banking might be the best place to begin your search for the right secured credit card. If they offer one, why complicate matters by going anywhere else?

"I would only get a secured card from a brick-and-mortar institution," he says.

Other Ways to Build Credit Without Debt

Of course, the biggest bill that most people have every month is their rent. Unfortunately, this doesn't go on your credit report most of the time. "Unless you rent from one of the top 50 landlords in the country, your rent probably isn't recorded to the reporting agencies," says Jeff Golding CEO of WilliamPaid, a company that lets anyone pay rent in such a way that it gets reported to credit agencies.

It makes a big difference: VantageScore is a competitor product to the FICO score that attempts to include things like rental and utility payments. "We found that using these types of payments 87% of people who were unscoreable became scoreable."

This is particularly good news for people without credit cards; generally you only get utility payments on a credit report when something goes wrong, long after the bill in question enters collections.

WilliamPaid works on an opt-in basis: Consumers sign up for the service, which requires verification of their information from a landlord. After WilliamPaid obtains the verification, they then report monthly bills to Experian RentBureau, where it appears on your credit report. The service is free provided that the same account is paid every month and it even allows people living with roommates to divide up the bill at no charge.

The results can be dramatic: "40% of people in the worst situations -- credit scores under 600 or no score at all -- get a score over 600 when signing up for the service.

For the college grad making his way in the world for the first time, this service can provide an excellent way to gain credit without getting a credit card of any kind.

Debt Vs. Credit: Avoiding the Latter and Using the Former

One important distinction to make is the difference between credit and debt: Debt is long-term while credit is just access to money that you don't have at the moment. Sullivan advises people to keep this in mind and advance to credit for things that they buy regularly. "Start off with a secured credit card," he says, "then get a store credit card and then a gas card." Just make sure that you pay them off every month and don't carry a balance.

"Any time you use credit it can be helpful," he says, "if it's from a source that reports to a credit reporting agency."

--Written by Nicholas Pell for MainStreet

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