how to build credit without a credit card?

How to Build Credit Without a Credit Card

Having good credit is incredibly important to your financial wellness and your future.

But building a solid credit score isn’t something that can happen overnight or even over a couple of months. Building credit is done by consistently making good choices with your money and credit. In order for banks and credit card issuers to recognize your creditworthiness, they want to know you make good personal finance decisions.

Without a good credit score, you will likely have a difficult time getting approved for loans, mortgages, or credit cards. You will be offered poor interest rates when you are approved, which will cost you a lot more money in the long run.

Although we aren’t anti-credit cards at RAVE, we know that sometimes you would prefer to steer clear of more plastic in your wallet. Maybe you have tried to get a new credit card, but the credit card companies won’t approve you due to bad credit or no credit. We completely understand, and that’s why we want to show you some of the other ways to build your credit without a credit card.

The Right Way to Build Credit

When it comes to building your credit, there are the right ways to do it and wrong ways to do it. In order to build credit, you usually need to have some sort of loan or revolving credit to your name. However, the worst thing you can do is to intentionally take on unnecessary debt just to improve your credit score. Those with poor credit or none at all are often also the targets of scams or predators.

You will want to avoid any sort of service that promises that they can solve all of your credit problems quickly if you pay them a large sum of money up front. Although it is not easy, building your credit will take some time and require hard work. It may not be easy — especially if you have bad credit already — but it is not impossible either.

First, you should understand how your credit score works and how each decision you make with your credit can help or hinder your progress.

Credit Score Breakdown

In order to understand how to best improve your credit score, you should understand how your credit score works. The main credit scores used by lenders account for several different categories, each one having a certain weight toward your score. It is extremely important to know how each decision you make with your credit will positively or negatively affect your score.

The five factors that affect your score are your payment history, your credit utilization ratio, the average age of accounts, the number and mix of accounts you have, and recent credit inquiries.

  • Payment History: This is a measure of how often you make on-time payments for your credit accounts, be they loans or credit cards. The more often you make your payments on time, the better. Any late or missed payments can severely hurt your score, since this factor accounts for 35% of your credit score.
  • Credit Utilization Ratio: This is a measure of the amount of credit you use on a regular basis as a percentage of your total available credit. For instance, if you have $10,000 of total credit available but only use $2,000 each month, you have a credit utilization ratio of 20%. The lower your credit utilization ratio, the better. The goal should be to keep this ratio under 30% every month. You also don’t want any individual credit card to have a high utilization ratio even if your total ratio is low. This factor accounts for 30% of your credit score.
  • Age of Accounts: This is the age of all of your accounts, from loans to mortgages to credit cards. The longer you have your accounts open, the better. This accounts for both the age of each individual account and the average of all of your accounts. When you open a new account, your age of accounts will drop. Creditors want to see individuals with longer credit history. This factor accounts for 15% of your credit score.
  • Number/Mix of Accounts: This is the number of accounts you currently have and the type of accounts on your credit report. The more accounts you have, the better your score will be. Banks and creditors like to see individuals that can handle many accounts responsibly. They also like to see borrowers that have different types of accounts on their credit profile — mortgages, installment loans, credit cards, etc. This factor accounts for 10% of your credit score.
  • Credit Inquiries: This is the number of recent credit inquiries you have on your credit report. Applying for new lines of credit results in the lender doing an inquiry (sometimes called a hard pull) on your credit report. Applying for new credit can be a sign of financial duress so the fewer inquiries on your credit report the better. This factor accounts for 10% of your credit score.

Check Your Credit Report

The first step you should take when looking to improve your credit score is to check your current credit report. Everybody gets a free look at their credit report from freecreditreport.com once a year. You are able to access your report from all three major credit bureaus: TransUnion, Equifax, and Experian.

It is not uncommon to find incorrect information on credit reports. There can be missing accounts that are in good standing or incorrect negative data that is hurting your credit score. You have a right to dispute incorrect information on your report, which you can do with whichever bureau has the wrong information.

Non-Credit Card Methods to Build Credit

Authorized User Status

An authorized user is somebody who is linked to another individual’s credit card account. Authorized users can spend on the account and also get the credit history of the account on their credit profile.

Generally speaking, the credit cards you carry are under your name, and you are responsible for paying them every single month. Typically, you are the primary user of a credit card, and if you handle them poorly, your credit suffers. If you handle them properly, your credit score improves. But an authorized user simply gets access to another person’s credit line to spend. So if you are an authorized user on somebody else’s account, your score will improve because your length of credit history increases and your payment history improves.

There are risks involved with being an authorized user on an account, so it is best to ask somebody you trust who handles their credit cards well, be it a family member or close friend. You don’t even have to make any purchases to get the same credit history shown on your credit profile. You don’t even have to be in possession of the card either. Just be aware that just as you can get all of the positive benefits, you can also get the negative effects if the primary cardholder makes late payments or makes poor decisions with the credit card.

Credit Builder Loan

Credit builder loans are one of the best possible ways to build or rebuild credit effectively. You are more likely to find a lender that offers credit builder loans among credit unions, especially one in which you already have a banking relationship.

Credit builder loans are unique in the way that they operate. These loans lend you a set amount of money but require a down payment up front as collateral — usually equal to the amount of the loan. This way the bank has the assurance that they will get paid in the event you default on the loan. You make payments on the loan over time until it is paid off.

The money you put down as collateral is usually put in a CD or savings account that earns some interest. Once you have paid off the loan in full, you will receive the full amount back along with any interest accrued.

The entire goal of these loans is to help individuals build or rebuild their credit. You can often be approved for them with bad credit or no credit history. Credit builder loans typically have low interest rates, as they are meant to help borrowers rather than make money off of them.

If you are short on cash, these types of loans might not be the best choice as they require the collateral cash up front. However, if you have some cash you can have tied up in the loan for a while, these are one of the best ways to improve your credit without a credit card.

Personal Loans

Some lenders do offer personal loans to lenders with suboptimal credit. With these loans, you borrow a set amount of money and pay it back over time. However, if you have poor or no credit, it may be harder to get approval for a personal loan.. 

If you have bad credit or none at all, you will often be charged a higher interest rate on the loan than if you had good credit. This will cost you more money in the long run, which is not ideal for your finances. We don’t recommend taking out a personal loan just for the sake of improving your credit score. However, if you are already looking to get a personal loan, be sure to make your payments on time every month to see your credit improve.

Student Loans

Odds are that if you went to college (or plan to go to college), you will have to take on some amount of student loans. Your student loans are reported to the three major credit bureaus and affect your credit score just like a credit card would (although in a slightly different way).

Having student loans will increase your length of credit history and show as accounts on your credit report — both of which will improve your credit score. You will want to be sure to pay your student loans on time every single month. Since payment history is the most important aspect of your credit score, paying these on time every month will significantly help your credit score.

Auto Loans

If you currently have a car that you make payments on, your car loans can be another good way to build your credit score without a credit card. If you are in the market for a car and have OK credit, you might still be able to be approved for an auto loan. Because the car itself is the collateral for the loan, you have a higher likelihood of being approved than with other types of personal loans.

These loans work like all other loans on your credit history and they report your payment each month. They also count toward your length of credit history and the number and mix of accounts.

Mortgages

Mortgages are likely one of the harder types of loans to be approved for with bad credit or no credit. However, there is still a chance that you could be approved for one, especially FHA (Federal Housing Administration) loans for first time home buyers. You can also try reaching out to credit unions with whom you already have a banking relationship.

Assuming large debt like a mortgage could hurt your credit score initially, but it will improve over time when you make your monthly payments on time each month. You probably shouldn’t try to get a mortgage just for the sake of improving your credit score, but if you are already planning to buy a house, it can help your credit, too.

Rent

If you rent your home or apartment, then you can potentially use your monthly rent payments to help build your credit. Rent payments are not usually reported to the major credit bureaus, but they can be. You may want to reach out to your landlord to see if they would be willing to report your monthly rent payments to the three major credit bureaus. All of the bureaus will include your rent information so long as it is reported.

There are rent reporting services like Rental Kharma (reports to TransUnion), Experian RentBureau, and Rent Reporters (reports to TransUnion and Equifax). They all charge fees to have your rent reported through them, but it could be worth the fee if you need to boost your credit score using on-time rent payment history.

One thing to be aware of is that the traditionally used FICO scores do not incorporate rental payment information into your score. However, newer versions of FICO scores do include rental information. VantageScore (the next most commonly used credit score) does use reported rental payments if they are reported.

Secured Credit Cards

Secured credit cards are technically credit cards, but we are including them here since they work in a very different way from traditional unsecured credit cards. They often don’t require good credit scores for approval, and you can even be approved for some with no credit. They also are meant for those individuals that are trying to build or rebuild their credit.

Secured credit cards require you to put money down as a security deposit. You are then given a credit limit usually equal to the amount of the security deposit. You can make purchases on the card and pay it off every month to start building credit history and payment history. If you can’t get approved for a traditional unsecured card, a secured credit card will likely be your best bet.

Why You Should Consider a Credit Card to Build Credit

Sometimes credit cards are not an option for you — either because you really don’t want to have one or you can’t seem to get approved for a new credit card. But if you aren’t in either of these two camps, you might still want to consider a traditional unsecured credit card to improve your credit score.

The first reason you might want to still consider an unsecured credit card is that they are one of the easiest and quickest methods to start building credit immediately. You can apply for a credit card online and be approved within a matter of minutes. You can have the card in your hands within a couple of weeks to start building your payment history.

Credit cards are also one of the best options because when used effectively, they are the cheapest way to build credit. Regardless of how much you spend on your credit card each month, if you pay it in full when your payment is due, you won’t pay a single cent in interest. All other types of loans will charge you interest on a monthly basis. You also won’t have to put down any security deposit like you do with secured credit cards.

On top of not having to pay extra, you can actually get paid to use your credit cards. Many of the best credit cards earn rewards in the form of cash back, points, or airline miles. So long as you don’t pay any interest on your credit cards or hold credit card debt, you will always come out ahead with some extra money back or a free flight for your next trip.

Additionally, credit cards can be handled exclusively by you without needing to coordinate with anybody else. This is a great advantage over being an authorized user or trying to get your landlord to report your rent payments each month. You alone are responsible for paying your bill, and nobody else’s actions can affect your score.

No matter how you decide to start building your credit, if you stay diligent, make payments on time, and avoid overspending, you will be on track to building your credit the right way. Don’t take on debt just to build your credit, and regularly check your credit reports for any incorrect information that could be hurting your score.

Patrick Beckman

Patrick Beckman is the Contributing Finance Editor for RAVE Reviews. Leveraging his educational training in engineering, Patrick has developed his own consumer finance strategies for household saving and credit card optimization. A centerpiece of his approach is his Travel-for-Free philosophy: Decide where you want to travel and what you want to do, and then reverse-engineer your credit card sign-ups and bonuses in order to travel to and stay in your destination of choice for free.