How To Build Credit Without A Credit Card
Victoria Araj5-Minute Read
UPDATED: July 26, 2023
Signing up and making regular payments on a credit card is one of the fastest ways to build credit and improve your overall financial health, especially as doing so leads to positively impacting you credit score. But it’s not uncommon for individuals to prefer taking a pass on a credit card, or have trouble qualifying for a one, which begs the question: How can you build credit without a credit card?
The good news is that there are actually many other ways that you can establish your credit history and boost your credit score that don’t necessarily require you to add a credit card to your wallet.
Building Your Credit Without A Credit Card
Having a strong credit history is vital, as it allows banks, credit unions and other financial providers to get a sense of how well you’ve managed your money, juggled your bills and paid back any sums loaned in the past. By using this information, they can get a sense of how much of a financial risk that you might present and then decide whether you’re a safe bet as a borrower.
As a result, whenever you look to borrow money, your credit history (a snapshot of borrowing history and repayment habits) will come into play. Likewise, potential landlords and mortgage providers may also look to it when deciding whether to work with you as a property owner or resident.
A higher credit score can offer you more favorable loan terms and rates, and therefore access to more financial opportunities. But by the same token, a lower credit score can limit the range of financial opportunities, terms and rates available to you. That’s why it’s so important to maintain good credit.
But on the bright side, you can absolutely build credit without a credit card, even though credit reporting agencies often look to credit card purchases and payments as a quick point of reference. In fact, there are several strategies that you can use to build a comfortable credit history.
Moreover, by keeping your debt-to-credit ratio relatively low (i.e. below 30%), and continuing to make payments over time, you’ll even put yourself in a position to build up enough credit to get a credit card in the future, if you should so desire.
Credit Builder Loans
Credit builder loans offer one handy way to build credit without a credit card, and can frequently be obtained from smaller, more regional institutions (i.e. credit unions) as a way to help borrowers establish a credit history.
When you obtain one, a relatively small amount of funds (e.g. $500 to $1,000) gets placed into a CD or savings account and held in trust until you’ve paid the loan off, at which point you gain access to the money. In effect, you cannot access these funds right away, as you might with a standard-issue loan. Rather, you make fixed payments for a set duration until you pay the loan off, at which point you can retrieve outstanding sums (and any interest that they’ve collected).
While credit builder loans won’t put money in your pocket right now, if you’ve made all your payments in timely fashion, you’ll have begun to build your credit – the true purpose behind these financial instruments.
Remember that you can also build your credit by obtaining a personal or peer-to-peer loan, provided you make payments on time. These types of loans (which may be offered to people with limited or even bad credit in select instances) require you to borrow a fixed amount of money and make a fixed payment each month.
Note that a higher interest rate may come attached to a personal loan than a credit builder loan, especially if you have yet to establish a credit history or have previously defaulted on loans. However, working with a co-signer (who also guarantees the loan) may help you reduce interest rates.
Another way to establish a credit history without a credit card is to purchase a car and make regular on-time payments to an auto loan lender. However, it’s important to understand that interest rates and terms on an automobile loan can vary. Bearing this in mind, you should always shop around to make sure that you’re getting the best deal for your vehicle.
While it may be more difficult to obtain a mortgage without a credit history, it’s not impossible, and may be worth exploring if you’re interested in home ownership. For instance, first time home buyers may wish to explore the possibility of an FHA mortgage, which can put the possibility in reach.
Alternately, you might consider a VA loan (for veterans and activate servicemembers) or USDA loan (for prospective homeowners located in rural areas). Ultimately, if you decide to take out a mortgage to purchase a property, you’ll be given the opportunity to pad out your credit history by making on-time mortgage payments.
Rent And Utility Bills
Many landlords and utility providers won’t report your monthly rent or service payments to credit agencies unless these accounts become delinquent. Nonetheless, establishing a steady stream of payments here can help you establish your overall creditworthiness, as can making recurring payments on routine bills such as cable, internet and cell phone service.
If your landlord or utility provider does not report payment activity, one option available to you is to ask them to contact credit agencies and provide this information directly. If that’s not possible, remember that some credit bureaus now offer expanded credit reporting services that can provide lenders with extended reports (drawing on public records and other additional sources of information).
Should you find yourself having trouble getting approved for credit, you may wish to ask financial institutions to obtain one of these expanded, more comprehensive reports instead.
Secured Credit Cards
A secured credit card helps those with little to no credit history. In effect, it’s a financial instrument backed by a cash deposit made up-front (often tied to a savings account). The card’s credit limit is then set at the total or a percentage of the funds contained in this account.
Capable of being used like any other credit card, you can use a secured credit card to make regular charges and payments. By keeping a zero or low balance and routinely paying your bills each month, you can use a secured credit card to establish your credit history.
A secured loan requires you to pay an up-front deposit, also called collateral, that serves as a backup if you default on your loan payments. Offered by banks, credit unions and other lenders as a way to help you build or repair your credit, a secured loan is specifically designed to help you establish and/or enhance your credit score.
Having trouble getting a credit card in your own name? You can also establish a credit history by becoming an authorized user on another credit card holder’s account.
Just be sure to make payments on time, as the account holder can be held liable for any discrepancies, and missed payments, late payments and other negative activity can reflect negatively on your own credit score.
Likewise, you can also open a joint account with another party who has a better or more well-established credit history. For instance, it’s not uncommon for parents to add a child or spouses to add a partner to their financial accounts.
Note that joint accounts require both cardholders to repay any outstanding balances. If balances borrowed are not repaid in timely fashion, both card holders may be subject to penalties, including a negative impact on their credit history and credit reports.
In addition, a variety of nonprofit lenders and charitable organizations now offer low-income borrowers across the nation a readymade way to obtain funds and financing while working to build out a positive credit history. Payments made to these lenders are reported to the credit bureaus and can potentially help you establish or ramp up your credit score.
As you can see, it’s possible to build credit without a credit card. The key is simply to establish regular and healthy patterns of borrowing and repayment, and to get in the habit of using your money responsibly. Employ the strategies outlined above, and you’ll be well on your way toward building and maintaining a positive credit score.
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