There are certainly plenty of reasons to avoid credit cards. However, there are an equal amount of reasons to get one. Either way, if you can’t get one or don’t want one, there are still several ways to build credit without one.
How to Build Credit Without a Credit Card
Here are seven ways to build credit without a credit card, plus one way that is technically a credit card but doesn’t require you to have credit to get it.
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.
It’s a challenging route for those who have little to zero savings. However, if you have the ability to get a CD loan, you can build credit 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 collateral (usually a home or car). Because the loan is unsecured, lenders will often charge higher interest rates to borrowers.
Borrowers with no or low credit scores usually have to get a cosigner. Otherwise, you’re facing high interest rates if you’re able to get approved at all.
Personal loans can be used for just about anything but should be used to help propel you further along the road of financial independence — meaning invest the money wisely.
It’s not wise to get a personal loan just for building credit, but we discuss such loans below. Make sure if you get a personal loan, you have a legitimate reason for it.
3. Rent Payments
Most landlords don’t report on-time payments to the credit bureaus. 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 rent payments, simply ask. If they don’t, ask them to consider doing it. If they decline, there are still options.
Currently, there are several companies that report your rent payments to credit bureaus. RentTrack is a relatively new company that aims to help consumers build credit 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 rent 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
Your payment history on a federal student loan is reported to all three major 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!
Any student loans that you receive to go to college that are made on time will help you build 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. Federal student loans are based on need, not merit.
5. Credit Builder Loan
Offered by credit unions, banks, and some online services, 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 monthly 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 credit builder loans is to establish positive payment history and build credit. Think of it as getting a federal refund check after you’ve done your taxes.
It shows up on your credit report as an installment 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 credit builder loans is that they 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 their account could positively impact your credit.
Make sure they make every payment on time and have a low to zero balance. By doing this, every monthly payment this person makes shows up as a positive payment on your credit 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. If you have someone that is willing to add you to their account, this is perhaps the best way to build credit.
7. Peer-to-Peer Loan
Another type of loan, peer-to-peer loans usually do report on-time payments (or late payments) to the credit bureaus.
Interest rates can be high, but they come with a higher limit 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 credit card issuer because, to use it, you must first deposit money. However much money you deposit is equal to your card’s credit limit; 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 secured card, you have a balance the same as you would on a credit card. Pay off the balance in full every month, and you will build credit the same as you would with an unsecured credit card.
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 build 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 credit scores 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 your overall credit utilization. Your credit utilization ratio is a percentage of how much credit you have available to you vs. how much 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
There are three types of credit. Installment, revolving, and open credit. Credit cards and home equity lines of credit (HELOCs) are revolving credit. Mortgage loans, auto loans, student loans, and personal loans are installment credit. Open credit includes utility accounts such as electricity, gas, water/sewage, garbage, internet, and cable TV.
The types of credit you have on your credit report account for 10% of your credit score. Generally speaking, you want a mix of different types of accounts to have a good credit score. So, for example, if you only have installment credit accounts and no revolving credit, your credit history is limited. Because of this, you’re considered more of a risk than a person who does and who makes on-time payments.