How To Build Credit Without a Credit Card

Building Credit, Personal Finance, Understanding Credit

You don’t always need a credit card to build credit. While it is one of the easiest ways, it isn’t the only way. If, like most people, you’ve amassed any kind of debt, you can have that work in your favor.

The key to good credit, no matter the type of debt, is to pay your bills on time.

This is how you can create a good credit history even if you don’t carry a credit card. The way people respond to their debt (e.g., paying it back on time) can prove to credit companies that they’re trustworthy and responsible borrowers.

There are quite a few different forms of debt, and spending, that you can use to better your credit. These include:

  • Mortgages and car loans
  • Personal loans and personal lines of credit
  • Student loans
  • Credit builder loans
  • Rent payments

Keep reading to see how each of these debts can help establish a trustworthy credit history to impress lenders, and help you get great rates on loans and credit cards later on.

Authorized Users

Become an authorized user on someone else’s credit card to build positive credit without applying for a card. The primary user should be making their payments on time.

Mortgages and Car Loans

Mortgages and auto loans are two of the most popular forms of installment loans, and the most common forms of secured loans.

While they have a more specific focus than personal loans, they operate the same way: Pay back what you borrow at regular intervals for a set amount of time. Making those payments on time will contribute to a healthy credit history, and therefore reflect favorably on your credit scores.

However, mortgages and car loans shouldn’t be used simply to build credit. If you’re looking for a loan that does just that, you should consider credit builder loans.

The terms you’ll get for these and all of the following loans are determined by a few different factors. Your credit scores, ability to pay, and how much you’re looking to borrow are chief among them. It’s also important to be aware of the different fees that may come with loans, like origination and late fees.

Personal Loans

Unlike mortgages and car loans, which are secured loans used for houses and vehicles, personal loans are (typically) unsecured consumer loans that can help finance any large or unexpected purchases.

However, their interest rates are typically higher than secured loans, like the two aforementioned ones. But they do usually have lower interest rates than credit cards. You can get a personal loan from banks, credit unions, or online lenders.

It doesn’t make sense to take out a personal loan for the explicit goal of building your credit. There are other options available for that, like credit builder loans.

And, be aware that bigger loans don’t necessarily improve your credit more than smaller loans. More important are factors like payment history, and how much of the loan you’ve paid off.

If you have a lot of existing debt, you can use personal loans for debt consolidation. That could help build your credit and cost you less in interest charges.

Personal Lines of Credit

Personal lines of credit land midway between loans and credit cards. You can request a certain amount you’d like to borrow, and then withdraw from it until you hit your credit limit. And like a loan, the interest rates are typically lower than what you’d find on a credit card.

But they differ from loans in that you won’t necessarily get the funds in one lump sum (unless you want to). Instead, you can withdraw from the line of credit as needed, similar to how a credit card works.

Making your required monthly payments will free up your credit limit, allowing you to borrow from the line again and again until it’s closed. Making your payments on time is always a good habit to get into, especially if you plan on moving into the world of credit cards.

When you apply for a line of credit, the bank, credit union, or lender will provide you with a credit limit based on your credit reports, scores, income, and all outstanding debts. Typically, you need pretty good credit scores in order to qualify for a personal credit line.

Student Loans

As reported by Forbes, student loans impact nearly 45 million Americans, collectively making up over a trillion dollars in debt. So it’s safe to say they’re a fairly common debt for people to have. And while they can certainly be debilitating, they could also help improve your credit scores.

This holds true even if your loans are in deferment (payments have been reduced or postponed while the balance doesn’t accrue interest, unless the loan is unsubsidized) or forbearance (payments have been reduced or postponed, but you still accrue interest). Loans in deferment or forbearance don’t affect your credit scores any differently than normal loans.

If you pay off your student loans and your accounts are closed in good standing, they (like other loans) could hang around on your credit reports for up to 10 years, contributing to your payment history and account mix.

Only Get Loans When You Need It

Just because student loans can help build your credit doesn’t mean you should take out a student loan. You should only take out a loan if you truly need it.

Student loans are designed for students, so unless you have aspirations to get a degree, you won’t be able to qualify. And perhaps most importantly, you’ll end up needlessly paying far more than what you initially borrowed due to interest. If you’re looking for a loan specifically designed for improving credit scores, consider credit builder loans instead.

Credit Builder Loans

Credit builder loans operate a little differently than other loans.

Instead of receiving a lump sum of cash and then steadily paying it back over time, it’s reversed. You make fixed payments for a predetermined amount of time, whether it be months or years, and then you get the money after it’s all paid off. Your loan is held in an interest-bearing account, and your monthly loan payments essentially act as security deposits.

It’s still a type of installment loan, but the whole point is to build up your credit scores rather than get money for a big purchase.

You can get a credit builder loan from federal credit unions, local credit unions, or community banks. You could also look into online lenders, but some may not report to all three major credit bureaus (Experian™, TransUnion®, and Equifax®). Self’s credit builder loans are a pretty popular option, and the company reports to all three.

Rent Payments

Scoring models including rent payment information into their credit score calculations is a relatively new thing. While credit bureaus have always included renting information in their credit reports (if the information was provided to them, anyway), there was no scoring model to incorporate the data. That is, until FICO® 9 and VantageScore® 3 and 4 came along.

However, not all landlords report your renting information to credit bureaus. Sometimes it’s only included when you’ve missed several payments and they report you to collections, which isn’t a good thing. So, the first thing you should do is check your credit reports or talk with your landlord to see if he or she is reporting your information, and if not, you could ask your landlord to do so.

Otherwise, there are services that offer to report your rent payments, for a fee. Although it’s unclear just how large of an impact this will have on your scores overall, every little bit helps — as long as you’re making all your required payments on time, that is.

But keep in mind, lenders will only see this impact if they use the above-mentioned scoring models, and probably any future iterations of them. Other models may not reflect any changes caused by your rent payments.

UltraFICO® and Experian Boost™

There are a couple of similar ways to improve your credit: UltraFICO® and Experian Boost™. Both incorporate more data than what’s typically included in scoring models, and this new information can lead to a jump in your credit scores.

UltraFICO® is geared towards people who have lower scores or limited credit. This scoring model lets you add financial information to your Experian™ credit report you’d like to be counted in the credit scoring process. You can opt in to have FICO® evaluate your bank records, like your checking, savings, and money market accounts, along with the rest of your Experian™ credit report. Having more financial information for them to pull from increases your chances of obtaining higher scores.

Similarly, Experian Boost™ takes different financial information into account to try to boost your scores. Experian™ will connect to your bank account and look at your records, like your history of transactions. It’ll look for telecom payments, subscription payments (such as Netflix), and utility payments, and will include them in your FICO® credit score. Negative payment history isn’t included, so there’s no risk of damaging your scores. This is a free service everyone can use, but you’ll have to provide your bank login details. This could pose a potential security risk.

If Experian Boost™ improves your credit profile, lenders will only see this effect if they look at your Experian™ credit reports, or credit scores that draw from Experian™ data. Those scores include FICO® Score 8 and 9, and VantageScore® 3 and 4.

If you have a FICO® score of 700 and you’re looking to get a new car, for example, a 20-point jump could get you a better interest rate and save you some money on a down payment. Programs like UltraFICO® and Experian Boost™ could help get you there. It’s all about making you look as good as possible to potential lenders, helping you get the best rate available.

Use Loans and Personal Lines of Credit To Build Your Score

Like we said above, the most important strategy for building credit is making sure you’re paying all of your loans and lines of credit on time. This means making at least the minimum required payment each and every month until your debts are paid back.

But be warned, missing a payment or making late payments will hurt your scores and reflect negatively on your payment history. Negative information, like delinquent accounts, can stay on your credit reports for up to seven years.

There are other facets to be aware of too, like credit utilization, your account mix, and hard inquiries. All of these play a role in your credit scores.

Credit utilization refers to the ratio of your total balances compared to your total credit limits, but only for certain revolving credit accounts. Installment loans (loans where you get a lump sum and pay it back at regular intervals for a set amount of time) such as student loans, personal loans, and credit builder loans, don’t contribute to your overall credit utilization. Credit utilization isn’t affected by personal lines of credit, either. Having low credit utilization will be good for your credit scores compared to high utilization.

Credit cards, on the other hand, will contribute to your credit utilization. So, in some cases, it can be a wise move to consolidate credit card debt with a personal loan, which would lower your utilization and potentially increase your credit scores.

The different kinds of credit accounts you have, like credit cards and loans, will also contribute to your overall account mix. Credit scoring models will typically give more points if there are different kinds of credit accounts attached to your name. So having a diverse collection could improve your scores.

And keep in mind that applying for almost any type of loan (or credit card) results in a credit check, which usually means a hard inquiry on your credit reports. A hard inquiry may initially bring your credit scores down a bit, so try not to apply for a lot of credit products in a short period of time.

Consider Using a Credit Card

While all the above options are viable ways to build credit, one of the simplest remains the humble credit card. If you’re paying off loans, meeting your minimum payments on time, and spending responsibly, you’re already prepared to step into the world of credit cards.

Not only are credit cards a good way to build up a positive credit history, but some cards offer rewards while doing so. There are travel cards designed to make your trips better, hotel cards for more comfortable stays away from home, cash back cards, and business cards. There’s a card for every occasion, and each one is a tool to better your credit, as long as you practice responsible habits.

And, if you have limited or no credit, there are cards designed for that too. While they typically feature no rewards and very few benefits, their primary use is to establish credit and to be used as a stepping stone towards better cards.

Secured credit cards are a good way to build or rebuild credit. Again, while not the most rewarding options, secured cards are a great way to repair your scores if you’ve made some mistakes in the past. They require a one-time security deposit that typically forms your starting credit limit, but you can get it back when you’re ready to move on. Once you’ve reestablished yourself, you can apply for more impressive, and rewarding, cards.

Credit cards are even a good way to keep a better eye on your spending. Each month you’ll get a credit card statement describing when and where you used your card, so it’s easier to budget yourself.

Building credit with credit cards works a little differently than it does with installment loans. The main difference between the two is how they impact your credit utilization ratio. As mentioned above, loans and lines of credit aren’t considered when calculating your revolving credit utilization ratio, but credit cards are.

That means the balances you hold on your cards, compared to your total available credit, can have a positive or negative impact on your credit scores.

If the total balance compared to your total available credit is low, your scores will generally be healthier. In FICO® credit scores, the most popular scoring model, credit utilization accounts for 30%.

Credit cards will also contribute to your account mix — a good thing when it comes to credit scores. Because credit cards are a type of revolving credit, they’re different from the installment loans mentioned above.

Authorized users

You can use credit cards without having to apply for one yourself. Most primary cardholders can request to add authorized users to their account. If a primary holder adds you as an authorized user, you’ll get your very own credit card, and in some cases, you’ll even gain access to a few of the benefits.

It’s very important, however, that you make sure the primary account holder doesn’t have any delinquencies on the account, and that he or she is capable of managing the account responsibly going forward.

It’s also good to be aware, more so for the primary cardholder, that when he or she takes you on as an authorized user, he or she will be held liable for the charges you make. You can pay for your own debt, of course, but the primary account holder is ultimately legally responsible for any and all activity done by the authorized user, so a family member or similar relationship would likely be your best bet.

If you become an authorized user, in some cases, the primary account’s reported transaction history will also be applied to your credit history. In other cases, only the transactions going forward will appear on your credit reports. It depends on the credit card issuer’s authorized user policy. But either way, that means your credit could be improved (or damaged) with very little effort on your part.

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