These days it's tough to get approved for a credit card – not that many young people want one anyway – so how will people build credit in the future?
There are a number of ways that you can build credit without taking out a huge mortgage loan or signing up for a debt-inducing credit card. The number of people between 18 and 29 without a credit card has doubled in the last five years, according to FICO. In fact, for people within this age group, all debt sources besides student loans have become less significant. Young people have, as a whole, reduced outstanding debt related to mortgages, cars and credit cards. Without nearly as much debt to pay back, how will young people prove their creditworthiness?
1. A credit builder loan
A credit builder loan is typically extended by a credit union or community bank. The purpose is actually to help individuals rebuild their credit scores, according to U.S. News and World Report. Usually these loans are small – rarely in excess of $1,000. The money is placed in a specialized interest bearing account with the credit union, instead of going to the consumer. The individual makes monthly payments until the loan is paid off, and then the money – plus interest – goes to the borrower. The best part about these loans is that they are reportable to traditional credit bureaus, making them a great way to build credit.
This situation is ideal for all involved, with consumers benefiting from the interest bearing account while the credit union takes on very minimal risk.
2. A secured card
Secured cards are backed by an account filled with funds by the consumer, Bankrate explained. The individual deposits a few hundred dollars into the collateral account, which then serves as a line of credit. Secured cards are treated by FICO just like regular credit cards and as long as the account is properly utilized, it can be a boon to individuals' credit scores. Within 18 months many companies will offer the chance to upgrade to an unsecured card and return the original deposit from the collateral account.
3. Track more transactions
The traditional credit bureaus track money that you borrow, but they don't take utilities or rent payments into account. Alternative credit scores are a great way to get a more accurate picture of your financial responsibility. Companies such as PRBC, around since 2002, provide a complete formula for calculating credit scores that takes into account positive transactions in addition to the negative information utilized by scoring models such as FICO.
"PRBC might not yet have the clout of the big three credit bureaus, but a solid report from PRBC might be enough to get your foot in the door with a lender," James Miller, owner of Biltmore Wealth Advisors, told U.S. News and World Report.