You're not supposed to pay interest just to build credit. That's what I've always said. But I've also seen people get stuck in a cycle of no credit, no loan, no credit, no loan.
There's a middle path: the credit-builder loan. And you can do something similar with a small personal loan.
I had a client — call her Keisha — who had no credit score at 32. She'd always paid cash for everything. No credit cards. No loans. She wanted to buy a used car, but no one would approve her.
We found a credit union that offered a $1,000 credit-builder loan. Here's how it works: the credit union puts $1,000 into a savings account you can't touch. You pay $85 a month for 12 months. At the end, you get the $1,000 back (minus a small fee, around $20).
Total interest: around $40. That's the cost of building a credit score. Keisha went from no score to a 680 in one year. She then qualified for a car loan at 7.9% APR.
If you can't find a credit-builder loan, you can create your own. Take a $500 secured loan from a credit union (you put $500 in savings as collateral). Or use a service like Self (I'm not endorsing them, just naming an option). The interest cost is around $50-100 for a year of credit history.
Now, here's the warning: don't do this if you already have credit card debt at 20%+ APR. Pay that off first. This strategy is for people with no credit or very thin credit files.
Keisha now has a 740 credit score, two credit cards she pays in full every month, and a car loan she's paying off early. She's in great shape. And she only spent around $40 on interest to get there.
I will keep posting updates on this. Check back soon.
P.S. Keisha sent me a photo of her first credit card statement showing a $0 balance paid in full. I almost teared up. That's literally my job satisfaction right there.
James