Most Americans have at least one credit card in their wallets, but times are changing. Scared off by the high interest rates, many adults -- especially Millennials -- are choosing to avoid credit cards and the risks they present to anyone who carries a balance.
But not using credit at all comes with its own risks. Lenders look at your credit history when deciding whether to give you a loan, and they're more likely to turn you down if you haven't demonstrated responsible debt repayment in the past. Fortunately, there are ways to do this without signing up for a credit card. Here are a few options you may want to consider.
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1. Become an authorized user on someone else's credit card
If you can find a friend or relative willing to help you out, you can become an authorized user on their credit card. Authorized user status gives you the ability to use their credit card as if it were your own, but the responsibility for paying the bill each month still rests with the primary cardholder.
Provided you both use the card responsibly, your credit score will improve. But if the primary cardholder misses a payment, that will also show up on your credit report, so it's important to think carefully before becoming an authorized user. Make sure you trust the primary cardholder to make their payments on time and to avoid racking up a bunch of debt. You should also hold yourself to the same standards, so as not to adversely affect your friend or relative's credit.
Before becoming an authorized user, it's a good idea to sit down with the primary cardholder and discuss any ground rules for using the card and how you will pay back anything that you charge to the card. You may want to put this in writing so you both can refer back to it later.
2. Get credit for paying your rent
Typically, your rent payment history doesn't show up on your credit reports, but the bureaus will include it if it is submitted to them. Making your payments in full and on time each month can help to boost your credit score.
Some online rent payment services will automatically report your payment activity if you request it. Check with your landlord to see if this is the case for you. Otherwise, ask if they would be willing to report your rent payments to the credit bureaus directly.
It's worth noting that while rent payments may show up on your credit reports, not all credit scoring models take these payments into account. So even if your rent is being reported, this may not significantly increase your chances of loan approval.
3. Get a credit builder loan
Credit builder loans are designed to help individuals with poor credit -- that is a score of about 630 or below -- or little to no credit improve their scores by demonstrating a responsible payment history. Credit builder loans are typically for small amounts -- $1,000 or less -- and unlike traditional loans, they don't give you the money you request right away. Instead, you make regular payments until the loan is paid off and then the money is released to you.
Essentially, you're prepaying for your loan. This minimizes the risk to lenders because they aren't out anything if you stop making the monthly payments. A credit builder loan may not be an option for you, though, if you don't have a lot of wiggle room in your budget because you'll have to pay money in each month that you can't access again until the loan term is up.
4. Take out other types of loans
If your credit is good enough to get a mortgage or car loan, these can also help to improve your credit score. Part of your score is determined by the mix of credit types in your name, so having several different types of loans can help you as long as you keep up with the payments.
If you can't qualify for a car or home loan, you could consider taking out a personal loan instead. These often have fewer requirements in order to qualify, though interest rates can climb over 30% for those with poor credit, so in that case, you may be better off going with a credit card.
Making student loan payments on time each month can also help to establish you as a responsible payer. With any type of loan, it's important to make sure that you'll be able to pay it back in a timely manner before you take it out. Otherwise, it could end up hurting your credit instead of helping it.
There are many different ways to build credit. While credit cards may be the most popular, you don't have to sign up for one if you don't want to. Just make sure that you're using some type of credit to demonstrate that you're financially responsible. That way, you shouldn't run into any trouble when you apply for your next loan.
