The standard advice given to young people for many years has been to get a credit card when first starting out on your own. The reasoning is that doing so will establish a credit history, making it easier to get loans for other things later in life. A recent law, however, will make it impossible for a person with no income under the age of 21 to obtain a credit card without a cosigner. While this law was designed to prevent college students from getting credit cards when they could not afford to pay the balance, it will result in young people having a harder time establishing credit.
It is possible, however, to establish credit without getting a credit card. People did it for decades before credit cards were given to anyone with a pulse. Establishing good credit is not as easy as it used to be, but it isn’t impossible to do.
The main things that make up your credit score are the length of time banks have been extending credit to you, the amount they are willing to extend to you versus the amount you have actually borrowed, and your payment history. These three factors make up between 60 and 85 percent of your credit score (depending on the credit reporting company), with the other factors consisting of things like number of open accounts and credit inquiries. The length of time companies have been extending credit to you is essentially out of your control, as is the amount extended. You can, however, start working towards improving these scores by taking a few simple steps.
Start by establishing an account history by opening a checking and savings account. This will “start the clock” on your credit report; it shows that you have performed some kind of financial transaction. Make sure that you keep these accounts in good standing; that is you never bounce a check or go below your minimum balance. For the same reasons, you will want to make sure that all of your utility bills are paid in full and on time. While having bank accounts and utility bills will not help your approved vs. accepted credit ratio, this will help to improve your score in the length of time you have been established and (if you make sure you follow the rules) your payment history.
To further improve your credit, consider taking out a loan. Although credit cards are harder to obtain for young people today, a car loan or a student loan can fulfill the same role in improving your credit score. Just taking out the loan will establish a credit history, and as you pay off the loan the amount of credit you have accepted will go down. Since the amount extended to you will remain the same, this will improve your extended vs. accepted ratio. Any type of consumer loan will also serve this function. Be careful, though, not to buy something on credit just because you believe it can improve your credit score. The idea is not to put a high dollar amount on credit; you want to show that you pay back the money you have borrowed. Taking out a loan for $1000 and owing $50 (a 5% extended to accepted ratio) can look better than taking out a loan for $10000 and owing $5000 (a 50% extended to accepted ratio).
A credit card can help with the extended to accepted ratio because credit card companies are famous for extending large amount of credit to people who have no real need for it. Plenty of people have cards with spending limits of $20,000 or more and yet they put about $1000 a month on the card. While credit cards used to be a good way to quickly obtain a high score for this ratio, they can also easily trash your credit score by closing down an account without explanation (nearly all cards have clauses in their fine print which allow a bank to do this) or lowering your extended credit limit. A bank loan such as a car or student loan is much less prone to this because you start by borrowing the full amount of the credit extended to you.
Credit cards do have several good security features built into them that bank debit cards do not usually have. Many also come with good rewards programs that can give away free airline tickets or money. These rewards, however, never match the amount you will pay in interest charges, making getting a credit card for this reason a bad idea if you do not pay off your balance at the end of every month.
I have personally lived without a credit card for over ten years. In fact, the only card I ever had was for a department store, and I closed the account a few months after I got it. I have never had a problem paying for anything; it seems that I can buy an airline ticket or rent a car with my debit card (with a MasterCard logo) without any problems. I have a credit score in the high 700s, and I have never paid more than 6% interest on any loan. Living without a credit card can be done, and you can establish a good history without one.
