Building Credit Without Credit Cards

I love my credit card, and I use it for everything. I love the rewards and the convenience of using a piece of plastic instead of carrying around cash. Cash to me is too much of a hassle. There’s no protecting your money if your wallet gets stolen, and since most employers use direct deposit instead of issuing a check, going to the bank or an ATM can be a potentially expensive annoyance.

Many people, however, don’t share my point of view on this issue. Using credit cards relies on a strong sense of self-control, and if you’re unable to pay off the balance each month, you could be entering a seemingly never-ending cycle of interest payments and expanding balances. So those would espouse a cash-only system certainly have good reason to do so, but there are some drawbacks to approaching your finances in this way.

Whether you agree with it or not, the concept of credit and credit-worthiness is interwoven with our modern economy. While you may be able to buy a car without financing it, there aren’t many people who can buy something like a house with cash, the terms of which are determined by your credit rating. Places such as apartment complexes and even employers run credit checks. From the perspective of someone working in the Washington, D.C. area, many people out here work for or with branches of the federal government, and many of those positions require some level of a security clearance. Part of that process is a credit check as well.

So despite your personal feelings towards credit, having a credit card is the easiest way to build a strong credit history. But if you are against having one, you’re going to have to find a way to build a positive credit rating while not compromising your beliefs. Fortunately, there are some ways you can do that.

If you need to secure credit but you don’t have a credit history, perhaps the easiest way to do this would be to enlist a co-signer who does have a credit history. This is the method most commonly used by young people looking to secure their first credit card. This is risky for other reasons, however. Financial transactions and personal relationships often mix like water and oil. I don’t feel comfortable asking friends or sometimes even family for lunch money. I would have to be in some dire straits to ask someone to co-sign a loan with me. And it’s hard to imagine a situation where I would be on the other side of that transaction. I value my personal relationships too much to place that amount of risk on them.

Fair Isaac might be able to help you out if you don’t have a credit history but are looking for a loan such as a mortgage. They have developed their “Expansion Score”, which takes into account other non-credit recurring bills, such as rent or utilities payments. A lack of a credit history but a strong showing in the Expansion Score – along with verified income – might convince a loan officer that you’re good for the money you’re attempting to take out. If a traditional bank refuses to lend you money, then you might want to look into exploring your options with a credit union. All credit unions are different, but across the board they’re known for their flexibility when working with their customers.

If none of those options are suitable for your needs, you can try borrowing money from yourself. You can open up a CD with a bank, then take out a loan against the money in that CD for the same amount that’s in the CD, for the same time period. With this method, you’ll be simultaneously paying interest on that loan as you’re earning interest off the CD. The obvious downside to this is the fact that the interest you’ll pay on the loan you take out will almost certainly exceed the interest you earn on the CD. But if you’re dead-set against any other type of loan, you will build a strong credit history based on that loan.

Building a strong credit history without having a line of credit can be complicated, but it also can be done. Do any of our cash-only readers have experience with this?

-Michael

Twitter: @michael_dink