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4 ways to build good credit without using a credit card

Don't carry debt to improve credit score
Millions of Americans mistakenly carry debt to help credit score 00:56

Credit scores are needed to qualify for a car loan or mortgage. And the way you establish a credit history is by getting a credit card, right? That's a familiar personal finance myth that has led millions of Americans to get their first credit card -- and risk falling into high-interest debt, experts say.

The average American in 2017 had two-bank issued credit cards and carried $5,551 in debt, according to the credit bureau Experian. Collectively, Americans have $1 trillion in credit card debt, more than any country in the world.

Here are four ways consumers can create a credit history without falling into the credit card trap.

Report monthly bills like rent and utilities

Bills like rent and utilities traditionally aren't used to create a credit history – only loans are. But new companies and scoring models are springing up that include monthly bills like rent, said Robert Harrow, a credit card specialist with ValuePenguin. Those bills include rent, cell phone, internet, utility and medical bills.

While these new models aren't commonplace, about 26 million people -- or 11 percent of the U.S. adult population -- lack the type of credit traditionally used to build a credit score. That's prompted companies to look for ways to reach that "credit invisible" population, he said.

How to rebuild your credit 06:16

One of those companies is ECredable, a credit bureau that uses data not traditionally used by the big credit bureaus of Experian, TransUnion and Equifax. ECredable instead relies on information such as rent and cell phone bills to create its own credit score for consumers.

"We wanted to help consumers and small business owners demonstrate their credit worthiness so that they could apply for loans," said Steve Ely, the company's chief executive officer. "The credit card is the easiest way to build credit, but far from the only way."

Companies such as Churchill Mortgage will give home loans to people without a credit history, said Erik Spencer, a senior loan officer with the company. Churchill taps alternative information such as on-time rent and utility payments to establish a credit history.

"This allows consumers who do not have a credit score to get a mortgage," Spencer said. "It's not for people with bad credit who have a lot of late payments. It's for people with little or no credit."

Get a bank-issued secured credit card

With a traditional credit card, the consumer gets a loan from a lending institution and pays interest on the money they borrowed. With a secured credit card, the consumer uses their own money to fund the credit card and that becomes the line of credit for the account. 

The lending institution then reports to the credit bureau that the consumer is paying the secured card on time. But consumers need to watch out for fees when using a secured card.

Get on someone else's loan or credit card

This is an especially popular way to build credit for young adults or even spouses. The person without credit is named on the credit card or auto loan of someone with established credit. This creates a history for the person without credit.

"This can be extremely risky for the credit holder if the other person should run up debt or not pay on time," Harrow said. "But it can be a useful way to build credit for those without it."

Join a credit union for a fresh start loan

The starter loan works similar to the secured credit card but because they are issued by a credit union, any fees tend to be less expensive. The consumer deposits money with the credit union and uses and pays back the money to establish credit.

So it's possible to live without a credit card, Spencer said. And for hotel and rental car reservations, consumers can use the debit card attached to their savings or checking account, he said.

"You have all these myths out there floating around like, 'I have to get a credit card as fast as I can because that starts my financial life'," Spencer said. "I haven't had a credit card for about seven years now, and haven't found a thing that I can't do with a debit card."

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