So you don’t want a credit card? There are certainly a lot of reasons to want to avoid having one, but there are an equal amount of reasons to get one.
Whatever your reason, you’re here because you want a good credit score without the hassle of variable APR and monthly payments.
Ready to learn how?
First, we’ll talk about how a credit score is established because you can’t truly understand how to fight the fight unless you know this.
Next, we’ll discuss why not having a credit card affects your FICO score and makes you less desirable to creditors. Lastly, we’ll go over plans that will help you circumvent the negative impact of not having any credit cards.
If you’ve never had credit, you may also want to check out our article ‘How to Build Credit from Scratch‘.
How is a credit score is established?
Before you can begin to improve your credit, it first takes an awareness of what is actually used to determine your credit score.
If you’re a seasoned vet when it comes to credit scores, it’s probably safe for you to move on to the next part. However, if you’re new to the credit scene and just beginning to wrap your brain around these things, keep reading.
The Five Credit Score Influencers
There are five categories that contribute to your credit score. They are:
- Payment History (35%)
- Amounts Owed (30%)
- Length of Credit History (15%)
- New Credit (10%)
- Types of Credit Used (10%)
Each is unique and will impact your credit in different ways; likewise, they are all connected. When one falters, others falter; when one is lifted, others are lifted. It’s a financial food chain, so to speak.
Your payment history reflects how often you have paid your bills on time. If you’ve ever gone bankrupt or missed a payment due-date by more than 30 days, for example, your score will be lowered.
This is why paying your bills on time is so important because this category is the biggest contributor to whether you have good or bad credit.
This category reflects how much money you owe on all of your accounts. Car loans, student loans, and credit card debt (if you have it), are all added together and are combined with available credit. In short, it’s what you owe versus what you still have available.
Length of Credit History
How long have your credit accounts been open or active? The longer the better for this one. Close an account that you have had for a long time, and you will negatively impact this category when it eventually drops off your credit report.
How new are your most recent accounts? How many credit inquiries have you had and when was the last time you had one? Too active and too quiet are both red flags.
Types of Credit Used
Credit cards, retail accounts, mortgages, and installment loans all mix together to account for 10% of your credit score. How much is too many or too little depends on the rest of your credit report?
Generally speaking, you want a long credit history to have a good credit score, so if you don’t have any credit cards or credit card debt, your history is limited and you’re considered more of a risk than a person who does and who makes on-time payments.
Creditors need to have something that they can gauge financial behavior, which leads us to the next section.
Why does not having any credit cards or credit card history affect your credit score?
Let’s look at this from the perspective of the relevant categories used to determine your credit score.
Credit cards are useful in that they provide opportunities for you to display your financial responsibility once a month. Without that history, institutions have less of an idea of who you are.
You are a blank canvas to them, and until you prove yourself in other ways, they are, unfortunately, going to assume the worst about you.
Length of Credit History
If you’re not making any payments on anything, the three credit bureaus don’t know much about your financial past or present. No information equals no data, and no data means you haven’t had any opportunities to prove yourself. Again, until you prove them otherwise, you are a credit outcast.
Types of Credit Used
Credit cards can provide credit diversity, and the more lines of credit you’re able to juggle month to month, the more likely creditors will be willing to trust you with their money.
If you’re only juggling rent and cell phone payments (which normally don’t report on-time payments to credit bureaus), then your credit will suffer.
How to Build Your Credit Without Credit Cards
1. CD Loans
Even if you have poor credit, passbook or CD loans are relatively easy to secure. To get a CD loan, you can use either whatever savings you have accrued or a CD account. Whoever grants the loan uses those funds as security should you fail to pay them back.
Obviously, this isn’t going to be an easy route to take for most average Americans, who have little to zero savings. That said, if you have the ability to get a CD loan, you can increase your score with it over time.
2. Personal Loans
A personal loan is what is often referred to as unsecured debt. Unsecured, in this case, means that your loan is not backed by any collateral (usually a home or car). Because the loan is unsecured, lenders will often charge higher interest rates to borrowers.
Borrowers with zero or low credit scores usually have to get a cosigner, otherwise, their interest rates are higher than most other borrowers.
Personal loans can be used for just about anything, but should obviously be used to help propel you further along the road of financial independence — meaning invest the money wisely.
Don’t simply get the loan to add credit diversity to your credit score! Make sure it has a legitimate purpose and isn’t simply satisfying an “I want this” scenario.
3. Rent Payments
Most landlords don’t report on-time payments. In fact, the only time rent-related credit data is collected is if your debt is sent to a collections agency. When this happens, the only way rent normally affects your credit is in a negative way.
If you’re not sure whether your landlord or property manager reports your payments, simply ask. If they don’t, ask them to consider doing it. If they decline, though, there are still options.
Currently, all there are several companies that report your rent payments to credit bureaus. RentTrack is a relatively new company that aims to help consumers raise their credit score without having to take on more debt.
How it works:
- Sign up, answer a few basic questions, and verify that you are, indeed, you.
- RentTrack processes your payment using either your bank, debit, or credit card to schedule your rent payment.
- RentTrack pays your landlord for you by either mailing a check or making a direct deposit. All payments are guaranteed to arrive on time with a confirmation logged in to their server when your landlord receives payment (that you can access and verify should you have a shifty landlord).
According to RentTrack, tenants using this service raise their credit score on average by 29 points in two months, and a whopping 132 points after two years. Considering that credit scores only go up to 850 points, this is quite a lot!
4. Federal Student Loans
Any payment you make on a loan is reported to all three credit bureaus. If you’ve gone to school and are now in the working world, make sure you make all of your payments on time. Those payments are reported!
If you haven’t gone to college but are considering it, know that, in addition to receiving an education that will help you with a lifelong career, any loans that you receive to go to college will strengthen your credit.
The great thing about federal student loans is that you don’t have to have a good credit score to receive them. In fact, you don’t even have to have one. These loans are based on need, not merit.
5. Credit Builder Loan
Offered by credit unions and banks, credit builder loans are great loans for people who have little to no credit history. You borrow a small amount (say $1,000) and make payments on that amount for one to two years.
Your payments are deposited into an interest-bearing CD or savings account, so you’ll get back a little more than you put in. However, note that you won’t have access to the funds until you’ve paid them in full.
The only purpose of this loan is to build credit. Think of it like getting a federal refund check after you’ve done your taxes.
It shows up on your credit report as a loan, so every monthly payment you make takes down the remaining balance, and is reported to the credit bureaus as an on-time payment.
The flip side to this is that it can hurt your credit if you don’t make those payments! Make sure you can make the payments before you sign up.
6. Authorized User
If you have a friend, family member, or loved one who is a responsible credit card user, becoming an authorized user on his or her account could positively impact your credit.
Make sure he or she makes every payment on time and has a low to zero balance. By doing this, every monthly payment this person makes shows up as a positive payment on your report, too.
You’ll also diversify your types of credit and gain access to the length of credit history associated with this account. It doesn’t matter when you enter the scene. You gain access to the entire history associated with the account.
It can’t be emphasized enough that the person you use for this being financially responsible. If they, for whatever reason, start missing payments, your credit score will be lowered and hurt, too.
And for those of you muttering, “I thought this was going to be about building credit without a credit card,” know that we’re not telling you to use the credit card.
You simply need to become an authorized user on it to make this hack work. The benefits of going this route are still worth considering, regardless of any moral high ground.
7. Peer Lender Loan
Another type of loan, peer lender loans do report every on-time payment (or late payment) to the credit bureaus.
The downside to getting a peer lender loan is that the interest rates are, as a whole, pretty high. But the loan limits are higher than a credit-builder loan so you get a little more flexibility there.
8. Secured Credit Card
This one’s technically a credit card, but not in the traditional sense. Secured credit cards are very much like credit builder loans, but the difference is that you get access to the funds immediately.
A secured credit card is no risk to the lender because, in order to use it, you must first deposit money to the lender. However much money you lend is equal to your card’s balance; so the more money deposited, the more credit you have available.
This money is then set aside and used by the lender should you not make payments. In essence, you are borrowing money from yourself.
Whenever you use your card, you then have a balance the same as you would on a credit card. Pay off the balance each month, and your credit will improve the same as it would with a credit card.