One of the fastest ways to establish or rebuild credit after it takes a dip is with credit cards. However, some people are wary of plastic, especially if they got buried in credit card debt in the past. Plastic can be very helpful when trying to bump your FICO score, but it’s a double-edged sword. If you don’t want the temptation, here are some alternatives to consider.
1 - Federal student loans
Although student loans are as frightening to contemplate as credit card debt, they can help boost your credit score in some cases. Once you get the loan, it shows up on your credit report, and if you pay it back on time, it boosts your payment history.
Not only that, but it also enhances the mix of credit aspect of your credit score since it’s an installment loan rather than revolving credit. The main consideration when taking out a loan is to pay it back. Only pursue a federal student loan if there’s a bona fide reason to do so.
2 - Personal loans
Personal loans can come from a bank, credit union, or other sources. Just be careful and don’t borrow from shady payday loan establishments. They charge exorbitant interest and don’t report to the credit bureaus, so there’s no upside to those places.
Only borrow from a legitimate source that will report the loan and payment activity to the credit agencies. Borrow a small amount, pay it back on time, and never run late on a payment. When you pay these loans over time, they build payment history and help your mix of credit.
3 - Peer-to-peer (P2P) loans
If you want another avenue of credit, consider a loan from an individual investor through an authorized network instead of a bank. Even though they are from individuals, these loans are not informal. Reputable P2P services routinely facilitate these arrangements.
Once you get the loan, you make the payments back to the individual investor through the network. These are often at lower interest rates, but you’ll need a good reason for the loan. Investing in your small business or an educational course is a good motivation.
4 - Authorized user
Another fast way to improve credit without a credit card is to become an authorized user on someone else’s account. They add you to the account, and you benefit from their positive account activity. It could be the account of a friend or family member.
If they are responsible, your credit will benefit. One way to convince them to give you a shot is to tell them to hold onto the card, so you won’t even use it. But be careful, it also goes the other way, and if the cardholder doesn’t meet their obligations, it might bite you!
5 - Auto loans
Auto loans are secured debt that are reported to the credit bureaus so long as you buy from a legitimate outlet. A buy-here pay-here establishment won’t and neither will some private financing agreements. Buy a car whose payments are well within your budget.
Don’t max out what you can borrow – be modest – that way if you have any financial hiccups you’re less likely to miss payments and foul up your credit score. A car loan boosts mix of credit and payment history aspects of your credit score.
6 - Passbook or CD loans
Sometimes, your bank may offer you a passbook or CD loan as an existing customer. This type of loan is essentially an overdraft where you withdraw more cash than you have in your account and then pay it back over time with a little interest.
Just be sure before you hop into this arrangement that it will report to the credit bureaus as a loan. If the bank doesn’t report it, there’s no reason to pursue the arrangement. Every action you contemplate should have a potentially positive effect or skip it and try something else.