There are many ways to build credit, but many individuals turn to credit cards and loan products to get started. But did you know that it’s possible to build credit using payments you already make for services? Select subscriptions may be able to lend a helping hand as you work to establish a solid credit rating.
Why You Should Build Your Credit
Your credit score affects every area of your life. So, even if you don’t plan to apply for a credit card or loan product, it’s vital that you start building it sooner than later. Below are some examples of why it’s important to establish credit that spans beyond securing the best deal on financing:
- Some employers check credit reports. Although they can’t legally view your credit score, employers in select industries will take a peek at your credit profile when conducting a background check to determine if you’re a good fit for the role. This practice is especially common if you’re applying for a job in the financial services industry or if the role you’re seeking will require you to access confidential financial data or manage the finances of the company or its clients. And if your credit history is limited or on the negative side, you could be turned down for a job opportunity.
- The landlord may check your credit when applying for housing. Whether you’re looking to rent an apartment, condo, villa, townhome or single-family home, you’ll typically have to undergo a background check and credit check before you can get approved. A low credit score could result in a denial or the need to make a steep security deposit. But if you lack credit history, you may not be given either of these options as the landlord won’t have any insight into how you’ve handled finances in the past.
- You can possibly avoid utility deposits. When you apply for utilities, the provider will usually check your credit. If it’s unfavorable, you’ll likely be required to pay a deposit that could be held until you disconnect services.
- Your insurance providers may offer premium discounts. In some states, providers can use credit-based insurance scores to set premiums. If your credit history is solid, you may be eligible for discounts on homeowners insurance and auto insurance coverage.
The Importance of Your Credit Score
Before diving into the significance of your credit score, you should understand how it’s calculated. For starters, there are two credit scoring models – FICO score and VantageScore 4.0 (the most recent VantageScore model).
How Your Credit Score Is Calculated
FICO scores are used by 90 percent of lenders and creditors to make lending decisions. It ranges between 300 and 850 and is based on the information in your credit report. Here’s the formula:
- Payment history: 35 percent of your FICO score
- Amounts owed: 30 percent of your FICO score
- Length of credit history: 15 percent of your FICO score
- Credit mix: 10 percent of your FICO score
- New credit: 10 percent of your FICO score
VantageScore 4.0 isn’t as prevalent as FICO but has risen in popularity over time. It also ranges from 300 to 850, but its credit-scoring formula is slightly different:
- Payment history: 41 percent of your VantageScore
- Depth of credit: 20 percent of your VantageScore
- Credit utilization: 20 percent of your VantageScore
- Recent credit: 11 percent of your VantageScore
- Balances: 6 percent of your VantageScore
- Available credit: 2 percent of your VantageScore
Why Your Credit Score Matters
Here are some reasons why your credit score is a vital component of your overall financial health.
- You may qualify for more competitive rates on debt products. The lowest interest rates are generally reserved for borrowers with excellent credit. A lower credit score or limited credit history doesn’t automatically mean you’ll be denied credit but expect the borrowing costs to be substantially higher.
- You could save a bundle in interest. A slight reduction in the interest rate on loan products equals tremendous cost savings over the repayment period. To illustrate, assume you take out a 30-year fixed-rate mortgage of $375,000. If the borrower offers you a 6 percent interest rate, you’ll pay $434,595 in interest alone over the life of the loan. But if your credit score improves and you’re able to qualify for an interest rate of 5.25 percent, the total amount of interest paid drops to $370,866 – a difference of $63,729.
- You’ll have access to a wider selection of credit cards and loan products. As your credit rating improves, more debt products with competitive terms will become available to you. However, with a lower credit score, the selection of credit cards and loans may be limited, and you may only have secured options that require collateral to choose from.
What are Subscriptions?
Subscriptions refer to services you pay for on a continuing basis. To illustrate how they work, assume you sign up for a subscription to a particular television network. The provider agrees to provide you access if you pay $10.99 each month by the due date. But if you skip a payment or stop paying altogether, you will lose your viewing privileges or access to the network. That’s the gist of how subscriptions work.
Can You Build Credit with Subscriptions?
There are services you can use to add alternative data, like subscription payments, to your credit report. You’ll typically have to pay a fee for these services, though.
How Do Subscriptions Help Build Your Credit?
Assuming you make timely payments each month, your payment history will improve as the subscription payments are added to your credit report. That said, since payment history is the largest component of your credit score, it will likely improve over time.
How to Set up Your Subscriptions to Build Credit
It depends on the platform you use. However, in most instances, the service you use will require you to sync the checking account used to remit payments to service providers. That way, they can easily view transaction history and use it to report to the credit bureaus.
Other Ways You Can Build Your Credit
If you’d prefer not to use subscriptions to build credit, there are other alternatives.
Report Your Rent and Utility Payments
You can also report rent and utility payments to the credit bureaus through an alternative credit-reporting platform. In most instances, payment must be made electronically through certain platforms or property management companies to be eligible for reporting.
Use a Secured Credit Card
A secured credit card works just like a traditional credit card. You’ll receive a credit limit that you can make purchases against and pay at least the minimum each month to keep the account current. Account activity is reported to the credit bureaus, and your credit history will likely improve if you manage the card and all your other debt obligations responsibly.
But you’ll need to make a deposit – typically equivalent to the credit limit – to get approved for a secured credit card. After that, it will be held by the credit card issuer until you close the account or it’s converted into an unsecured account (if that’s an option).
Sign Up for a Credit-Builder Loan
You can also use a credit-builder loan to boost your credit health. It’s a bit different from a traditional loan, though, as you won’t receive the loan proceeds upfront. Instead, you’ll make monthly payments to the financial institution each month, and once you reach the end of the loan term, the funds will be released to you.
These loan products help build credit by reporting payments made each month to the credit bureaus.
