For those who don’t want or can’t get a credit card, it’s a good idea to know how to rebuild credit without a credit card.
Most financial experts state that credit cards can be pretty useful, but just because you can doesn’t necessarily mean that you should.
How Credit Cards Help
There is no denying you can use credit cards to build credit as long as you use your cards responsibly. It is also important that you know what happens when you max out your credit card so you avoid this situation and make sure the credit card gives you the needed credit boost. Here are some ways credit cards can help:
They Are Effective for Building Credit
Credit cards tend to be quite effective when it comes to building credit. They are often one of the first financial vehicles people use with a small credit limit; they offer individuals the opportunity to prove they can handle debt responsibly.
They Are an Ideal Option for Lenders
Most lenders view responsible credit card use in a positive light—which is why some people use them to build credit. The cards give holders a set limit and some freedom on how much they can use. This also means that you can build credit at your own pace. How you use your credit card can tell an agency a lot about you and your capability to manage funds.
They Offer Effective Reporting of Payments
When you use your credit card and make the necessary payments, your information is shared with relevant credit bureaus, allowing you to build credit. This is a very important aspect if you are trying to determine when the best time to apply for a mortgage may be.
Issues You Could Face by Using Credit Cards to Build Credit
There are some downsides to using credit cards to build your credit, some of which include the following:
The Chance of Getting Into Debt
If you are beginning to build credit, you may find using credit cards to be more than you can handle. Despite being a great tool for purchasing items and building credit, there is always the risk that you will overspend. One reason for this is that credit cards offer you an easy way to spend more money than is in your account.
Extremely High Interest Rates
If you intend to use credit cards to build credit, you should know the interest rates they charge. If you can’t clear your balance in full at the end of every month, you will start accruing interest on the balance. This can soon lead to the amount you owe growing very quickly, forcing you to turn over most of your money to fix your credit card overspending.
The Aspect of Utilization Rates
Lenders often don’t like to see a person using credit simply because they can. Maxing out your credit cards can look bad on your credit report, while never using them may offer no benefit to you either. As a result, one must understand the right percentage of credit to use to attain the best results. This can be a little confusing, especially for someone who is new to using credit cards. You always have to pay attention to your credit limit versus your spending. In most cases, your utilization rate should be under 20%. If you can, keep it between 3% to 5%.
Other Options
Another aspect to consider when building credit through credit card usage is that there are other effective options to choose from, such as a conventional bank loan. They can, at times, come with lower interest rates and fewer risks.
In Summary
While credit cards can be an ideal way of building credit, they come with some risks. As a result, you can consider alternatives such as a phone plan, rent payments, and conventional loans to help boost your credit history.