Unconventional Ways of Building, Improving Your Credit History
Young people coming out of college find themselves in a credit conundrum: How to build a credit history when they are deep in student loan debt.
Many are not carrying credit cards — a traditional method of building credit — because their student loan debt averages about $35,000 and that’s a hefty load already on their budding credit reports. Student debt also forces many to postpone life events that build credit like buying houses, applying for car loans or getting married, a 2013 survey by The American Institute of CPAs shows.
Here’s what many recent college graduates – and a lot of other people in debt – don’t know: There are non-traditional ways out of this personal finance dilemma. These are paths that credit companies and banks all acknowledge as credit-building.
Young Borrowers Letting Go of Credit Cards
The hefty weight of that student loan debt keeps many young people fresh out of college from applying for credit cards. In fact, a 2013 study by Sallie Mae and Ipsos shows credit card ownership among college students dropped from 42 percent in 2010 to 35 percent in 2012. Among those cardholders, nearly three-quarters claim they owe a balance of less than $500.
The Sallie Mae/Ipsos report shows that sophomores experienced the largest drop in credit card ownership in 2012. The only group of college students that increased their ownership of credit cards in 2012 were seniors, but not by much compared to previous years.
Non-Traditional Credit Reporting
Alternative credit bureaus like Payment Reporting Builds Credit (PRBC) are putting a creative spin on the credit building process and boosting a potential borrower’s creditworthiness by tracking on-time monthly payments for insurance, cable, telephone and rent bills.
The PRBC reports positive payment data to certain lenders to show you are responsible in other financial areas of your life and not just a debt carrier.
Traditional credit bureaus like Experian, Equifax and TransUnion generally only track loan and credit card activity which measures a borrower’s debt. Information about on-time payments isn’t reported to these traditional bureaus unless you are delinquent and that hurts your credit score.
Generally smaller and non-traditional banks subscribe to the PRBC.
Experian Considers Other Factors to Show Creditworthiness
Chicago-based WilliamPaid is a payment processing company that makes automatic rent payments for renters. The company partnered with Experian in March to let users add their rent history to their credit reports to build credit.
Rent is often someone’s largest monthly payment and proving they can pay this amount on time can raise their profile.
When individual renters — many of them without bank accounts — sign up for the service, the company draws the rental funds from sources like prepaid debit cards and credit cards. WilliamPaid pays the account holder’s landlords and rental property owners with those funds at the same time every month.
WilliamPaid collects that on-time payment data and reports it to Experian, if the user chooses that option.
Jeff Golding, president and co-founder of WilliamPaid, calls the service a “game changer.”
“Experian is the largest credit bureau in the world, so when a traditional lender, not a niche lender, is looking to give someone a loan, they are going to pull [credit information] from the big three,” Golding said. “It’s helping people in a certain credit space go from zero to 60 in a much faster manner.”
WilliamPaid is held to strict government requirements under the FTC’s Fair Credit Reporting Act. For example, if the company is late sending a member’s rent payment, they are required by law to fix the problem —not the consumer.
Spend Your Own Money to Build Credit
Another unconventional method of building credit is paying for it yourself.
Secured credit accounts from banks essentially function as a debit card and a credit card wrapped in one. Instead of asking for a credit extension, you must provide the money up front to the lender. That deposit often becomes your credit limit. Unlike a debit card, your activity with a secured credit card is reported to credit bureaus.
Sometimes people with thin credit histories can be approved for small personal loans that help build credit through timely monthly payments. You can repay that loan with the same borrowed funds plus a little more out of pocket to cover interest.
Think of it as a small price to pay right now for what you’re ultimately trying to accomplish.
Make What You Owe Work for You
Think about common expenses as unconventional sources.
Debt management is important for building or improving any sort of credit. The types of debt people are turning to is changing the credit building process. Rent and utilities can now get you to the next level with potential lenders when you don’t have much else to show them.