7 Easy Ways to Build Credit Without a Credit Card

If you want to make transactions in our modern world, then understanding how to build credit is essential. Everything from the best apartment options to buying a car depends on having solid credit. In fact, some employers even use creditworthiness as a deciding factor in the hiring process, so it’s important to work towards establishing a positive credit history. But what if you prefer not to get a credit card?

True, an excellent credit score can be difficult to build even with a credit card, let alone without one. But it’s not impossible. You’ll just have to take a different approach. Whether you don’t have any credit but eventually plan to get a credit card, or you don’t ever plan on opening a credit card, there are still some best practices you should follow.

To earn credit responsibly, here are seven ways to build credit without a credit card.

1. Obtain Authorized User Status

Often referred to as “credit piggybacking,” authorized user status allows you to leverage someone else’s credit. In this scenario, the primary holder of a credit card adds you as an authorized user on their credit card.

Your credit report then acquires the entire history of that credit card account and is translated to your credit score. One of the perks of authorized user status is that even if you never use the card, card activity (from the primary holder) can still be reported to the credit bureaus and used to boost your credit.

Benefits of authorized user status

Of course, there’s some risk to this method. Since your credit report will reflect how the card is used, you should only become an authorized user on someone’s account if you trust them and know they have a good credit history (specifically on the card in question). Otherwise, you’ll be taking on the negative history of the card, which isn’t great for your credit health.

Lastly, be sure to verify with the credit card company that they report card activity for authorized users so you don’t waste your time.

2. Get a Credit Builder Loan or a Secured Loan

Credit builder loans are a lesser-known type of loan and their sole purpose is to help you establish, or repair, your credit history. These loans work the opposite way of a traditional loan or credit card because you borrow a specific sum (usually no more than $1,000), but don’t have access to the funds. Instead, the lender deposits the money into a CD or savings account. You then begin repaying the amount and the lender sends your payment pattern and balance to the credit bureaus.

Once you pay the balance, you get your money back, and, in the process, you’ve helped build a positive credit history. Essentially, you’re paying off your loan ahead of time.

How credit builder loans work

Keep in mind that these loans typically pay out only a few hundred dollars at a time, but they allow you to practice good credit habits on a small scale.

3. Pay Your Federal Student Loans

If you went to college or are considering taking out student loans, it’s important to consider how these loans will impact your credit score. Just like any other loan, student loans show up on your credit report, so it’s important to pay them on time to help establish a positive credit history.

Most federal student loans don’t require that you begin making payments until after you’ve graduated or you’ve dropped below half-time. But, you can start building good credit habits and building your credit score sooner by making monthly student loan payments while you’re still in college.

Private student lenders are also an option, but these loans are often more difficult to get if you don’t already have an established credit history and qualified income. (Of course, you should never take on student debt just to build credit—that would be a bad strategy that could make it harder to get yourself out of debt in the future).

4. Pay Your Rent On Time

Most credit files don’t contain your rental history, simply because most landlords don’t bother reporting that activity unless it’s negative. However, all three major credit bureaus—Experian®, Equifax®, and TransUnion®—do include rent payment information in credit reports if they receive it.

In this case, you may be able to take advantage of using a rent reporting service that takes a bill you’re already paying and reports it to credit bureaus. This is usually more common with large commercial rental complexes as opposed to private renters.

Services that report rental payments

If you’re evaluating a rental or you currently rent, you should ask the landlord if they’ll report your rent payments. If you pay your rent online, it’s worth checking if the provider will report your rent activity to credit bureaus, as some online payment service providers allow for this.

Lastly, you can leverage external services like Rental Kharma or Rent Track that will report your rent to the major credit bureaus. These services can add up to two years of past rental payment history at your current rental — including those of your spouse or a roommate. They also act on your behalf by contacting your landlord or property manager to verify your rent payments.

5. Pay Your Mortgage or Car Loans

We know this is obvious, but it’s worth mentioning the value of paying your monthly car payments on time. Especially because vehicle loans are typically larger than the limit of most credit cards, how you handle your car loan payments is important.

6. Use Alternative Credit Scores

Many utility companies check your credit when you first create an account but don’t report on your monthly payments. This can be especially frustrating if you’re diligent about paying your phone or electricity bill every month, since this can be a positive signal of a good payment history.

Experian Boost offers a way to have your cell phone and utility bills reflected in your credit report with their credit bureau. If you have a good track record for your regular monthly bills on Experian Boost, you might receive an instant boost to your existing credit score.

Keep in mind what they report on is limited specifically to Experian and does not include other credit bureaus.

7. Peer-to-Peer Loans

In a nutshell, peer-to-peer (P2P) lending takes the institution of banking out of the equation and allows borrowers to connect directly with individual lenders who fund loans in small increments, with the accrued interest going back to the investor.

These loans can be set up through a reputable P2P service and offer a valuable alternative to credit cards. That said, some peer-to-peer loans may require a credit check, so if you don’t have any established credit, it may be hard to get one. This is usually recommended for someone who has established at least some credit and is looking to boost their credit score without dealing with an institution.

What to Be Aware Of When Building Your Credit Without a Credit Card

Because credit is such an important part of navigating everyday life, it’s important to be aware of scams or things that may hurt your credit.

Predatory scams – These typically target people with no credit or bad credit, and often come in the form of loans that guarantee approval and ask for some type of payment up front.

Payday loans, title loans and pawn loans – These loans will not help you build your credit. In fact, they can severely damage your credit score. For example, if you miss payments or default on your payday loan and the account is sent to collections, this delinquency can hurt your ability to build a good credit score.

Credit diversity – You can certainly navigate life and build credit without a credit card, but keep in mind that not having a credit card may prevent you from building a better credit score. Ten percent of your credit score is based on the types of credit on your report—i.e., the more robust and different types of assets you have on your credit report, the better.

What to watch out for when building your credit

How to Responsibly Build Your Credit

Let’s start with the basics: what’s a good credit score?

Credit scores range between 300 and 850 (depending on the credit scoring method) — the higher the score, the better. With this in mind, a good credit score is typically at or above 700. Due to the high economic diversity within the U.S., the average credit score varies greatly among different populations, ages and income levels.

The average FICO score in America is 695 and the average Vantage score stands at 673 (these are two of the most widely used scoring models in the country). Because different scoring models exist, average figures can fluctuate by a few points, but most fall between 660 to 720.

There’s no shortcut to building good credit. Doing so takes time and a history of on-time payments. Following these best practices will help you keep your credit on the right track and build a solid credit history.

Pay Your Bills on Time

This might seem obvious, but on-time payments are one of the biggest factors in a positive credit score. Regardless if it’s a car payment, medical bill or a student loan payment, ensure every payment is made on time. If you can, it’s always a good idea to set up automatic payments or reminders for any upcoming bills, so you don’t accidentally forget and hurt your credit score in the process.

Keep Your Credit Utilization Low

If you have credit cards, it’s important that you don’t use all the credit that’s available to you, as this sends negative signals to credit bureaus. As a rule of thumb, it’s best to keep your credit utilization (the amount of credit used out of your available credit limit) under 30 percent at all times.

Don’t Acquire Too Many Accounts

Building good credit is a rewarding feeling and it can be tempting to apply for credit cards once you’ve established credit. However, be aware that every application you submit puts a hard inquiry on your credit portfolio, which can ding your credit score.

If you apply for multiple credit cards within a short amount of time, this is a quick way to drop your credit score and hard inquiries remain on your credit report for two years.

Moral of the story: Strategically apply for credit cards when you’re ready for them.

Hold on to Accounts in Good Standing

The longevity of your credit accounts is one of the many factors that plays into establishing a good credit score, so if you’ve built an account with history and good standing, keep it open. The longer an account is open, the more it helps your credit score.

This means keeping credit cards open even if you don’t use them anymore. Not only does this help boost your debt to credit ratio, but if you close an account in good standing, that will stay on your credit for 10 years.

Monitor Your Credit Score

Building good credit doesn’t just stop at a good credit score, it’s a constant process. Not only is checking your credit score regularly important for knowing where you stand, but it’s a way to monitor for fraud, ensure everything on your report is accurate and respond to any changes quickly.

For example, if your credit score falls, you can use the information in your credit report to figure out what might have caused the change. Then, you can take steps to recover the credit score points you lost.

Responsible credit practices

If your credit has taken a hit or you’re looking to rebuild your credit score, can help. We offer everything from credit education resources to services that can help you remove inaccurate negative items from your credit score, challenge items on your credit report and help you build a healthier relationship with your credit.

Posted in Credit 101
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