Last Updated on February 1, 2022 by pf team
Often, there are other ways to build credit without a credit card, some of which may be a better fit for your needs. For many people, a credit card marks one of the first steps when building credit. But getting a credit card doesn’t always have to come first.
You may want to start with some options below and then add a credit card later to provide more flexibility and to improve your overall credit score.
What credit score do you start with?
Most credit scoring models start at 300, meaning 300 is the lowest score you can get. But most people have a higher initial credit score.
The age of your credit plays a role, but weighs less heavily than factors like payment history or credit utilization. This means that even people with newer credit files can achieve a respectable credit score and then build from there.
Absent any early credit disasters, expect your first credit score to land between 500 and 700. For some types of borrowing, lenders want to see a solid history.
A good credit score is a starting point, but if you don’t have much credit history yet, you may not qualify for some types of loans.
Ways to build credit without a credit card
Historically, a student credit card or a department store card have been common ways to get started with building credit. However, a credit card isn’t always the best fit for your needs and both options can be an expensive way to borrow.
Fortunately, there are other ways to build credit without a credit card.
1. Apply for a credit-builder loan
Imagine a loan that gets funded after you make all the payments. Sounds backwards, right?
Well, that’s how most credit builder loans work. With a credit-builder loan, you can show your ability to make payments on time.
Your lender reports your payment history to the credit bureaus, helping you build a solid credit score without the financial risk that can come with larger loans.
Most credit-builder loans have repayment terms ranging from 12 to 24 months.
2. Take a federal student loan
As another type of installment loan, a student loan can help shape your credit and do so in a big way.
Because your payment history makes up 35% of your credit score, an on-time payment history can give your credit score a healthy boost.
You’ll also benefit from a wider mix of credit if you have other types of credit as well, like an auto loan, for example. Your mix of credit makes up 10% of your score. Having more types of credit is better for your credit score.
3. Build credit with a peer-to-peer loan
Peer-to-peer (P2P) lending platforms have gone mainstream in recent years but the core concept has been around for as long as we’ve had money.
Instead of borrowing from a bank or credit union, you’re borrowing from other people, people not unlike yourself. The lenders in P2P platforms earn interest on your loan but you also benefit by growing your credit payment history.
Large P2P lending platforms like Lending Club report your payment activity to the 3 major credit bureaus. Be aware that some platforms require a minimum credit score to qualify.
You’ll need a 500 credit score or higher to qualify for an FHA mortgage loan.
Since most people fall into this range at the beginning of their credit journey, it may be possible to build your credit score early on with a mortgage.
However, it’s important to know that your chances of being approved increase with a higher score. Less than 40% of hopeful mortgage borrowers with a score of 550 or lower get approved.
5. Auto loan
You’ve seen the signs or ads for auto dealers that finance anyone. Auto loans are available for people in nearly any circumstance, including those just starting their credit history.
However, if you have bad credit or a thin credit history, it can be harder to get approved with some lenders and the loan itself can be more costly.
The vehicle secures the auto loan, which helps newer borrowers to qualify.
6. Consider Passbook or CD loans
Think of a passbook loan or CD loan as a secured loan. The balance in your passbook savings account or CD account acts as collateral for the loan.
Some banks lend up to 100% of the account balance while others limit loan amounts to half your balance.
Passbook or CD loans are installment loans and can help build your credit score as the lender reports your payment history to the 3 major credit bureaus.
Check with your bank or credit union to see if they offer this loan option.
7. Become an authorized user
In many cases, if you’re designated as an authorized user on someone else’s credit account, you’ll inherit the credit history for the account.
While this can be a good thing, be aware that your credit score can also take a hit if the account falls into delinquency later and you're still an authorized user.
As an authorized user, the account history passes on to you — but you are not legally responsible to make payments because the account isn’t yours.
8. Find a co-signer
A co-signer agrees to pay your balances if you can’t make payments. Often, a co-signer is a parent but could also be a friend, spouse, or someone else willing to take responsibility for the debt.
A co-signer with good credit can help you get approved for credit if you’re otherwise ineligible because of a thin credit history.
9. Get credit for your rent payments
In most cases, your credit report doesn’t reflect your rent payments — unless you have an unpaid balance, eviction, or another housing-related blemish on your report.
Fortunately, there are ways to get your on-time payments recorded on your credit report.
Several services now offer this benefit but expect to pay a fee. However, the results can be meaningful.
For example, RentReporters.com advertises an average 40 point boost to your credit report within 10 days.
10. Report utilities and phone bills
As with rent payments, utility and phone bill histories don’t appear on your credit report — unless there’s some bad news like a late payment.
Now, Experian offers a way to increase your credit score by giving you credit for your on-time payment history.
Experian indicates an average increase in credit scores of 13 points by people who use their Experian Boost service.
How to maintain a good credit score
Building credit and maintaining a healthy credit score requires that you follow some key rules and build sound financial habits.
- Pay all your bills on time. With your payment history making up 35% of your credit score, it’s essential to pay bills on time. If a bill isn’t paid within 30 days after its due date, there’s a good chance that the delinquency will ding your credit score. For credit reporting purposes, 30 days isn’t actually 30 calendar days. Instead, it’s one month following the due date. Some creditors wait until the account reaches 60 days past due before reporting the delinquency. In either case, the negative entry stays on your credit report for 7 years.
- Establish a long credit history. The average age of your credit accounts also plays a role in your credit score, although not as large a role as your payment history and credit utilization ratio. Be sure to keep this in mind if you have older credit cards or credit lines you’re thinking about closing. Chances are good that closing an older account will drop your credit score slightly because you’re reducing the average age of your credit accounts.
- Don't use all the credit available to you. Your credit utilization ratio refers to the amount of credit you’ve used compared to the amount of credit you have available. It’s best to keep the credit utilization ratio of your revolving accounts under 30%. This part of your credit score makes up just under a third of your credit score.
- Don't apply for too many new credit cards. Whenever you apply for new credit, you can expect a short-term effect on your credit score. Lenders use what’s called a hard inquiry on your credit report when you apply for a new credit account. The effect on your score is short-lived. However, when combined with other factors, your credit score can take a while to recover.
- Consider paying down debt. Paying off an installment loan early won’t increase your credit score directly. However, by paying off the loan early, you won’t have any late payments on that account in the future. You’ll also free up some money each month to help ensure you can stay current on your other credit accounts.
- Find and dispute errors and fraud. Mistakes happen but when those mistakes affect your credit report the end result can be costly. The Consumer Financial Protection Bureau, reports some common credit report errors as identity errors, mistakes in account status reporting, and incorrect balance reporting. Be sure to review your credit report for errors and file a dispute if you find any mistakes.
- Check your credit at least once a year. The easiest and safest way to get your credit reports is to request a 3-bureau report from AnnualCreditReport.com. The 3 major credit bureaus operate this site to comply with federal requirements. By law, you’re entitled to a credit report from each of the 3 credit bureaus at no charge once each year.
Why you might want to apply for a credit card
While there are sound reasons not to apply for a credit card as your first type of credit, there are also some advantages to having a credit card.
Credit diversity equals to 10% of your FICO credit score
Your payment history and credit utilization make up the largest parts of your credit score. But your credit score also considers how many types of credit you have.
For example, if your only type of credit is an installment loan, your credit score may be lower than if you have a revolving line of credit as well.
Your credit mix represents the 4th largest factor in your overall credit score. Not having a wide mix of credit types won’t tank your score.
But every little bit helps and a credit history that only shows one type of credit account isn’t as healthy as it could be.
Advantages of owning a credit card
In addition to improved credit diversity, having a credit card offers other advantages as well:
- Safer online purchases
- Better fraud protection than debit cards
- Credit card rewards
- Cash-back or travel miles programs
- Free credit scores with many cards
- Perks like extended warranties
- Travel benefits and rental car insurance perks
- Flexibility to handle unexpected expenses
- Lower minimum required payments than a personal loan
We’re all motivated by different things financially. Some might like the idea of cash-back cards while others may take comfort in knowing they have some money available for unexpected emergencies.
There’s another factor to consider, though. In today’s world where so many transactions take place online or through mobile devices, it’s much safer to use a credit card than to use a debit card.
A fraudulent charge or an overcharge to a debit card can set off an avalanche of bounced checks, late payments, or other banking issues.
By using a credit card instead, you’ll have time to dispute an incorrect charge without it affecting your bank account.
Final word on building credit without a credit card
In the long run, your credit score and your finances in general can benefit from having at least one credit card. Of course, it’s also important to use your credit line responsibly.
However, you can build a strong credit score without having a credit card at all. If you choose, you can always apply for a credit card later after you build a solid credit history.
In fact, don’t be surprised if the credit card lenders find you first and send you offers. With a solid credit history, you’ll qualify for better rates and maybe even a few extra perks you wouldn’t get without the great credit score you’ve earned.