How to Build Credit Without Going Into Debt
Many people, including financial professionals, believe the only way to build your credit is by going into debt. This is simply not the case.
After getting into debt and climbing out of my financial hole, I realized it is not necessary for a young adult to get a credit card while in college to build their credit history.
I also realized there is simply no need to take out a loan for a car in order to qualify for a mortgage in the future.
Of course, these methods are some of the easiest methods, but they are not necessarily the best route to take when you are interested in building wealth.
Our financial culture basically worships the FICO score, which is really just a debt score when you think about it.
It is made up of five different factors:
- Payment history
- Amounts owed
- How long you’ve had credit
- New credit
- Mix of credit products
Nowhere in those five factors does it say anything about your net worth, how disciplined you are about saving money or how you stay within budget each month.
It simply looks at your ability to take out debt and repay it.
But what if you want to live a debt-free life? Do you not want to depend on debt products to make financial decisions?
“You can be in control of
your own financial decisions.”
Thankfully, there are three ways to build credit without going into debt.
1. Pay your rent consistently and on time.
If you are a renter and want to start stashing away money to own a home one day, you can use the history of paying rent on time (for two years or more) to build credit.
There are multiple ways to do this, but the one service I use is WilliamPaid.
They work with the Experian RentBureau to ensure each rent payment made through the site is reported on your credit report.
You can also sign up for alerts so your rent is never paid late. This is something you can do for free.
Even if you do not use a service like WilliamPaid, you can still prove you make rent payments on time by keeping accurate records and setting reminders for yourself each month.
2. Pay your utilities on time.
Another way to build credit without using debt is to pay your utilities on time.
In the case that you are getting free rent from a friend or family, you can still put the utilities in your name and start making payments on time.
An awesome service to use is for this is eCredable.
It gathers all your utility bills, insurance statements and even mobile phone payments to create an AMP credit report.
These types of bills are not normally included in your regular credit report, but eCredable uses advanced technology to verify your bills and track your goals.
Then it exports your payment history to a verified report for your bank or loan officer whenever you are ready to take out a mortgage or other loan.
If you prefer not to use eCredable’s service, that is fine. It will just take some extra record keeping and work, but staying out of debt is worth it!
3. Prove stable employment and certifications.
This is especially valuable for people who are self-employed or work part time. It is more difficult to show stable employment when you have been laid off or work for yourself.
But if you can boost your income through side businesses, or receive certifications for continuing education, this will be very helpful in building a solid credit profile.
In order to prove your creditworthiness without using traditional debt methods, it takes a little bit more time and energy.
When you have been in debt and crawled out of it, the extra work is definitely worth it.