Build Your Credit - Restore Your Credit with Credit Unions and Secured Loans
Restore Your Credit History Without Using Credit Cards
Last Updated: March 30, 2016
Who says you need to use credit cards to build up your credit? Well, maybe we did. So, what advise can we offer our readers who don't want to use credit cards? For those of you who can't get a credit card in today's tight economic environment or maybe you do not trust yourself with a credit card, we have good news for you. You can rebuild your credit history without using credit cards and we will show you how.
Apply For a Secured Loan From a Credit Union
A secured loan is a type of loan which is backed by either collateral or money you place in a saving account or a certificate of deposit. The best place to apply for a secured loan is your local credit union. Credit unions look at more than just your credit score when evaluating your credit worthiness. They are looking for ways to give you the loan, not like a traditional bank who is looking for ways to shoot down your loan.
Using a Peer-to-Peer Loan
Peer-to-peer, or social, lending sites such as Lending Club or Prosper try to connect borrowers with individual investors. Investors bid on a borrower's application and the investor willing to provide the lowest interest rate to the borrower wins the contract.
You want to make sure the loan and payments get reported to all three credit bureaus. Lending Club does report to all three bureaus but Prosper only reports to Experian and TransUnion. Also, the minimum credit score for a borrower using Lending Club is 660, whereas Prosper requires a credit score of at least 640.
Apply For a Federal Student Loan
Federal student loans do not require a credit check, but you have to be enrolled as a college student at least half-time to qualify. You do not have to show financial need and the rates for unsubsidized and subsidized Federal Stafford Loans in 2015 were fixed at 4.66 percent for undergraduates and 6.21 percent for graduate and professional students.
This loan will not show up on your credit report until you are in repayment mode. Then, once you start making on-time payments, your credit score will get a boost.
Become an Authorized User on a Credit Card
If you are added as an authorized user on someone else's credit card, his or her history is typically reported to your credit report. Just make sure this person is responsible with the card and charges lightly and makes their payments on time. If they don't, this will negatively affect your credit report and score.
You do not have to have access to this card but you should make sure the credit card reports the information to your credit report. Some cards will report authorized-user information only for spouses or family members.
Use a Co-Signer to Qualify for a Loan
Getting a co-signer can help you obtain a loan you might otherwise not get which will help you build your credit score. Co-signing is risky for each party so make sure you are prepared to make the payments on time - or you are going to trash the other person's credit. Unlike authorized-user status, you can not be removed as a co-signer and you will be responsible for the loan until it is paid off.
Use a Charge Card Instead of a Credit Card
Isn't a charge card the same as a credit card? No, it is not! A charge card, such as American Express or Diner's Club, does not allow you to carry a balance. You are generally required to pay your bill in full every month and typically there is no preset spending limit. The benefit to using charge cards is you do not have to worry about credit utilization, which can account for up to 30 percent of your FICO score. Charge card balances aren't included in credit utilization formulas so you can run up a big bill without fear, as long as you pay them off in full when your bill arrives.
Avoid These Ways to Rebuild Your Credit
You may be tempted by other ways to rebuild your credit, but many have hidden traps or don't work. The following are methods you want to avoid at all costs:
- Prepaid Cards. Some prepaid cards promise to help you build your credit, but the fees are often high, and your activity may be reported to an "alternative" credit agency, rather than to the big three. 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. AccountNow doesn't even do that, this prepaid card reports to the Payment Reporting Builds Credit, an alternative credit-reporting agency.
- 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 more for merchandise you buy from one of these outfits, and your payments typically aren't reported to the three major credit bureaus.
- Other Loans. Loans from your retirement plan or life insurance policies won't help boost your scores because your payments aren't reported to the bureaus.
So, even though the fastest way to build or rebuild your credit is to use revolving accounts (credit cards) or installment loans (mortgage or auto loans), some consumers are not able to obtain either one of these in today's economy. Fortunately, there are other ways to increase your credit score and build up your credit. Now, there is no excuse for bad credit so take our tips to heart and start working on making your credit better!