Alternative to Credit Cards


What is your credit score? The question many young people dread when applying for a loan. The idea of building credit can make someone from any background begin to sweat. Hardly any of us have been taught what credit really means let alone how to build good credit. A common way is by getting a credit card and using it like a debit card. Buying groceries and gas with it only when you already have the money, and paying it off as soon as you get the bill. I want to show you briefly a few alternatives (yes alternatives) to building your credit through the use of a credit card.

Bill Payment

By paying a bill as simple as your rent on an apartment you are actually improving your credit score (As will other recurring payments such as a home loan or student loan, but let’s concentrate on getting those loans before we pay them off). Making consistent and on-time payments using these methods will build your credit; but on the down-side they are slow ways of doing it. They often take years to build up any sort of credit difference. It’s better than nothing, but its going to take you a while to build enough credit to qualify a of substantial loan.

Borrowing For A Car Loan

The best and quickest way that you can build your credit is through a car loan. Once you have built a little bit a credit, or if you have a relative who would be willing to co-sign a loan with you, buying a car and paying your loan off quickly (But not too quickly) is the most effective way to build your credit. (As an aside, paying off the entire amount of the car loan within a few months may seem like a good idea but for one it builds no credit as you are creating no payment history, and also it can actually look negative on you credit report as it may be construed as you totaling the car and receiving an insurance payout to pay off the loan.) A car loan increases your credit by showing payment history and the capacity to pay off a loan. Making these payments on time will give you good credit, making payments early and making extra payments will greatly increase your credit. It will pay off the loan faster, and prove that you are responsible and want to be debt free.

Early Payments

Obviously, as I brought up earlier, a mortgage can be a great source of credit. For example if you had a 30-year mortgage, and each year you made one extra payment, you would have that loan paid off in 20 years. This technique shows creditors that you will honor their loans, and will make your credit score sky-rocket. If you need someone to co-sign an auto loan for you, then after 1 year of using this technique your credit will be good enough that you will qualify for the loan on your own.

Loans In General

I work at an insurance company that has its own bank and we often deal with getting people different kinds of loans. I have heard from lenders and customers countless times that the best way to improve your credit it to get an auto loan, and pay it off quick. Using a credit card or paying rent may build your credit, but building it through an auto loan is the most efficient and therefore makes the most sense.

First Time Auto Loans

Importantly, first time auto loans (Meaning this is your first time borrowing money for the purchase of a car) have certain extra stipulations regarding who can borrow and how much you can borrow. Obviously they check your credit but generally amounts over around $5,000 require a co-signer to even receive a loan at all. This applies even if you have perfect credit and is the way of the bank protecting its own interests. On top of this most auto loans in general require that the car be in decent condition (As determined by the teller generally, haha) and sometimes go through a brief “check-up.” During this check-up the teller pretty much makes sure that the car has an engine and runs. They may check such things as safety mechanisms and functionality depending on the bank as well.

Wrapping Up

To finalize this information I want to lay out a brief disclaimer. I work in the finance & insurance industry and even I do not entirely understand what goes on when it comes to credit. No one really does. The best you can do as far as building your credit is diversify. By that I mean try it all. Do everything you can to show that you know how to handle your money correctly. Pay bills on time, pay back your loans, avoid late or missed payments. When it comes to this there is not much “more” to it. If you handle your money well and smart then it will eventually show in your credit score. Don’t feel that a credit card is the only way to improve your credit just because of the name, but don’t discount it as a tool to get you where you want when used properly as well.

Author: This article was authored in part by Tara of Colt Sampson’s State Farm Insurance Agency and edited by myself, Jeff Kingston. You can learn more by contacting Tara or Colt Sampson.

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