By Hrishikesh Menon. Edited by Arjun Chandrasekar.
Credit is the trust of a lender in the borrower that the lent money will be paid back in by a set date. It can be built with financial instruments such as credit cards, installment loans, monthly settlements, etc. This article will cover a brief history of credit and building credit with and without a credit card.
The concept of credit dates back 5,000 years to the first civilizations such as Sumer and Babylon. These civilizations created laws based on credit lending with interest rate ceilings. Fast forward to the 16th century when several European explorers were looking to venture the seas to find better trade routes; they needed to raise capital for their ventures which led to an increase in credit borrowing. Over the years consumer credit spending increased. In the early 20th century, cars such as Henry Ford’s Model T were introduced but at a hefty price which led to a credit loan boom. In 1958, Visa released the first credit card in Fresno, California which facilitated credit purchases. Starting from 1970, the government put in more effort to organize a very messy credit system. The FICO score was introduced in 1989 which is the official name for a credit score. As the Information Age advances, we continue to see more applications of technology in credit reporting.
There are many ways a person can establish credit. Applying for a credit card is the most common way to establish credit. Other ways include: taking credit-building loans which are low-risk loans created solely to help people establish credit, adding yourself as an authorized user on someone else’s credit card who has a good credit history, purchasing items on a monthly installment basis and paying the installments in full on time, and many more.
Building Credit Without a Credit Card
It is not as hard to build credit without a credit card as it seems. Following simple steps such as paying off loans in full and on time can help build credit. For a person with a brand new credit history, there are special loans such as credit-builder loans which can help build and maintain a good credit score from the jump. Other ways to build credit without a credit card are: adding alternate payments onto your credit record, applying for low-risk loans such as personal or car loans, etc. Alternate payments are other monthly payments along with the ones made for credit. This may include rent, car payments, subscriptions, house payments, etc. Although there are quite a few options to build credit without a credit card, the fastest and most efficient way to build and maintain a good credit score is to apply for a secure credit card. These options to build credit without a card should be used by people with newly established credit. Their goal should be to be able to apply for a secure credit card with reasonable interest rates, card limits, liquidity, etc.
Building Credit With a Credit Card
The best way to build credit is through obtaining a credit card. To do so, first, the potential consumer must apply for a credit card account. People with little to no credit history have very low options for a secure credit card so following the steps above to build a strong credit without a card and then applying for one is a good idea. A secure credit card is one where the customer must make a security deposit as collateral against their account. If the customer misses out on payments and defaults on their account, the collateral is then used to settle the debt. Another way to obtain a credit card and build credit is through applying to be an authorized user on another person’s card. This will establish or build credit based on the credit history of the main cardholder. Once a card has been obtained, it is essential to maintain a good debit-credit ratio. The optimal ratio is keeping it less than 10% and the amount to avoid is greater than 50%. The average recommended ratio is less than 30%. This ratio is calculated by dividing the credit card balance by the limit established. For example, Chris applied for a credit card with a limit of $2000 and he has already spent $400 of it which puts his balance at $400. Chris’ debit-credit ratio will be $400/$2000 which is 20% and that is an acceptable ratio. Last but not least, once monthly payments have been paid in a timely and orderly fashion and a good credit history has been established, the cardholder should apply for a limit increase which will increase the cardholder’s purchasing power and help build better trust or credit with the bank.
Credit has been around since ancient times. One can establish credit with credit builder loans or adding oneself as an authorized user. Credit can be built without a card mainly through paying monthly installments on time and repaying any existing debt. Credit is built with a card through obtaining a secure card, maintaining a good debit-credit ratio, and paying monthly payments on time and in full.