Credit is something that everyone needs. If in the future you want your child to be able to buy their own car or house, they will need to have established credit. If the thought of giving your child a credit card brings beads of sweat to your forehead and makes your hands feel clammy, then you aren’t alone. Setting your child loose with a credit card without knowledge of how credit works or them being mature enough could be detrimental to their future. So we are kind of in a dilemma here aren’t we? On one hand you want your child to have established credit, but on the other hand there is no way you are setting your child loose with a credit card. What if I told you, you can do both? Continue reading if you would like to know how to build credit without a credit card.
What is credit?
Before we can talk about how to build credit, we first need to define credit. Credit is simply the result of borrowing loans such as credit cards, house loans, and car loans. Your credit is reflective on you. Having good credit is key, when wanting to rent an apartment, buy a house or car. Some insurance and phone companies review a customer’s credit before allowing them to purchases their goods and services. Also employers have been known to check a potential employee’s credit before hire. As you can see it is almost unavoidable to not have established credit. What all of these businesses are looking for when checking your credit is if you are financially responsible. This means how likely are you to pay them back.
Every time you borrow money, you are establishing a credit history. Your credit history is made up of a credit report. A credit report shows loans you have borrowed in the past and currently have open, the credit limit of each loan, the amount you currently owe on each loan, any late payments, and any bills that have been sent to collections.
However instead of reviewing line by line of your credit report, businesses will review your credit score. This is a computer generated number based on your credit history.
You can check your credit report three times a year. It is important to do so to make sure everything is accurate. I once checked my credit report and noticed a credit card open in my name that I never authorized. This would have affected my credit score, had I not seen this and reported it. Checking your report is also a great way to check for identity theft.
3 Ways to Build Credit without a Credit Card
It is quite possible to build credit without having a credit card. Maybe your child is not of age to receive a credit card themselves. Usually you have to be at least 18-21 years of age in order to receive a credit card. Maybe you don’t want your young adult to have a credit card just yet, at least not until they can show some financial responsibility, and have a steady job to pay for expenses. It could also happen to be that you yourself do not wish to use a credit card or do not have a credit card. However in order to build credit you must have some form of debt or line of credit. Here is how to build credit without a credit card.
1. Student Loan
As I have mentioned in other blog posts before, I borrowed student loans in order to attend college. It just so happened that my student loans helped me not only pay for college but also purchase a car. Just not the way you think. It was about a year after I had graduated from college. At this time my loans were out of their grace period and now into repayment. So each month I was making on-time payments to my servicer. I needed a more reliable car and was in the process of purchasing one. There was no way I could pay the entire amount for the car. I had a nice down payment and had calculated what I could pay monthly in a car payment. Before I could purchase the car, I had to be approved for a car loan. At this point I did not have any credit cards. However, because I had been paying monthly on-time payments toward my student loan, I had established enough good credit in order to receive a car loan without a co-signer. Between my down payment on the car and my good credit from paying my student loan, I was able to drive out of the dealership with my new car. I also want to say that I paid my car off early too!
My husband actually had a different story when it came to buy his first car. The car he had before he purchased his first car, took a turn for the worst. It was a good car, but when parts start falling out of the car while you are driving on the interstate on your way to your own engagement party, it’s time to get a new car. Those were some good times! Anyway, when my husband went to purchase a new car he was not able to be approved for a loan by himself, he had to have a co-signer. The reason why he was not approved for a loan was because he did not have an established credit. My husband also had to borrow student loans in order to attend college, however his student loans were not in repayment yet and he did not have any credit cards. Once my husband found a co-signer, his credit was established and was able to build credit without a credit card.
Another example of a loan where your child could build credit is a private student loan. The loan would be in your student’s name, and you, the parent, would be the co-signer.
3. Authorized User
Now, if you do have a credit card and it is just the matter of not wanting your child to have a credit card, I completely understand. If that is the case, you could make your child the authorized user of your credit card. How it works is, your child would have their own credit card with their name on it with purchasing power. You, the parent, would still be the primary account holder, which would mean you will be held accountable to pay back all purchases your child makes. I could see this working where your child purchases gas for the car using their credit card and at the end of every month your child pays you the amount spent in gas, which you then use to pay the credit card.
This could be a great moment for teaching about financial responsibility. Your child will learn very quickly about the value of a dollar, how to budget, and building good credit. It is something to consider but you are going to want to set some ground rules. In the Guide to Securing Your Child’s Credit Future by The Simple Dollar, they recommend that you consider putting these guidelines in place.
* Don’t use a primary account – open a new account with a low spending limit
* Create a usage agreement – details of how the credit card be used, and how much can be charged.
* Use an account with a clean history – if you do not think you can make the credit card payments on time every month, this could hurt your child’s credit history.
Related Post: Want to be Financially Healthy? Start a Budget
As you can see, it is possible to build credit without using a credit card. Having good credit is essential for many reasons. However it isn’t necessary to have additional debt in order to establish credit. Credit cards can be harmful if not used properly. If you do decide to use a credit card to build your credit, make sure to find one with a low credit limit, low interest rate, only purchase items with a credit card when you know you already have the money in the bank, and always pay your credit card bill in full when the payment is due.
What do you think, is your 18-23 year old mature enough to use a credit card responsibly?