Key Takeaways

Credit cards may be a useful tool to improve your financial standing, but having low credit scores is not uncommon. In fact, 40% of consumers have a FICO score of less than 700. But there are other credit repair strategies to build credit, like getting a secured card or becoming an authorized user. Regardless of the option you choose, make sure to pay your bills on time and only borrow how much you need.

4 Ways to Build Credit Without a Credit Card

Credit reporting agencies often use your credit card payments and purchases to evaluate your creditworthiness, but there are other methods of building credit without a credit card. Here are four effective methods.

1. Paying Bills on Time

One of the best ways of building credit without a credit card is by ensuring timely payments each month. Your payment history accounts for 35% of your credit score, so it’s important to pay bills on time.

If you have any other loans like personal, auto, student, or rent and utility bills, paying them on time will ensure that you do not accrue any penalties. It will also show financial consistency and help you improve your credit score. An easy way to stay on top of your bills is by setting up reminders on your phone. Setting up autopay is even more effective.

2. Becoming an Authorized User

Many credit card issuers allow consumers to add authorized users to their credit cards, which can be a great way to pursue family credit management together. If you have family members or friends who are willing to add you to their card as an authorized user, you’ll be able to receive a card and get access to the line of credit without going through a credit check.

Becoming an authorized user is an easy option if you’re just starting out and want to build a credit history. Keep in mind, though, that if the main cardholder maxes out the credit limit, accumulates a lot of credit card debt, or fails to make payments, it will impact your credit also.

3. Credit Builder Loans

If you have bad credit or no history, it may be difficult for you to qualify for a traditional loan. But you may still be able to get a credit builder loan. With this type of loan, the lender will put the full loan amount in a secure account. You’ll have to make fixed monthly payments until you repay the entire loan. Only then will you receive access to the loan amount.

Credit builder loans are a great way to build credit without a credit card because you’ll be making regular payments, which lenders report to the credit bureaus.

4. Rent Reporting Services

Traditionally, landlords do not report rent payments to credit bureaus. But if you’re making timely rent payments, there’s still a way to get them included through rent reporting services. Third-party services can report your rent payments to the three major credit bureaus and may help you build credit without a credit card. However, the service is not free, and it doesn’t guarantee that the credit bureau will consider it or will help your credit score.

Experian Boost is another great option to consider. This service allows you to build your credit score for paying bills like rent, streaming services, utilities, and cell phone. 

How do Credit Scores Work?

Your credit history is reported to the three major credit bureaus, TransUnion, Equifax, and Experian. Credit scoring models use a variety information to determine your credit score, such as the type of accounts you have, debt, and if you’ve been paying your bills regularly. Lenders can take a look at this number to determine your creditworthiness. Here are the main factors that help determine your credit score.

  • Payment History: Your payment history accounts for 35% of your credit score. If you get behind on your bills, it can negatively impact your credit score. The more recent and longer the delinquency, the greater the negative impact will be. On-time payments will improve your credit score.
  • Amounts Owed: Your current debt accounts for 30% of your credit score. Your credit utilization ratio is the total amount of debt you have divided by the amount of credit you have across all accounts. Ideally, your credit utilization ratio should be 30% or lower.
  • Length of Credit History: The average age of your accounts accounts for 15% of your credit history. This may impact young adults who have very little credit history or those who tend to close accounts very quickly after opening them.
  • New Credit: 10% of your credit score depends on your new credit. Opening too many credit accounts in a short period of time can have a negative impact on your credit score.
  • Credit Mix: The variety of credit accounts you have accounts for 10% of your credit history. Having a larger mix of accounts, such as credit cards, car loans, and mortgages, is better than having fewer.

Advantages of Building Credit Without a Credit Card

Now that you know more about how to build credit without a credit card, let’s talk about the advantages of doing so. All of us need good credit history to set up new accounts, handle financial transactions, rent an apartment, purchase a car, and more. For most people, the first step in building a credit history is by using credit cards.

Luckily, using revolving credit is not a necessity for building credit. One big benefit of not having a credit card is that you won’t have credit card debt. Credit cards carry a high-interest rate, so it may be difficult for you to pay off credit card debt once you accumulate it.

Another benefit is that if you don’t have a credit card, you won’t be as likely to overspend. It’s easy to use credit cards as a source of income, and many people tend to spend more when they have a credit card instead of cash. This is why it’s crucial not to use a credit card unless you’re careful about how you spend money, track your expenses, and have a plan to clear your balance each month.

Tips for Building Credit Without a Credit Card

Other than the methods listed above, there are several ways to build credit without a credit card. Consider some of the tips below.

Building Credit for Loans and Mortgages

If your goal is to build credit to get qualified for mortgages and loans, there are things you can do. 

  • Always pay your bills on time. Whether you are paying utility bills, student loans, or anything else, it’s important to pay them before the due date.
  • Keep your accounts open. Do not open new accounts and close them in a short time.
  • Avoid applying for several new accounts at once. This will result in multiple hard inquiries and can hurt your credit score.
  • Consider getting a co-signer for a loan. A co-signer with a good credit score may make it easier for you to get approved for a loan.
  • Get a secured credit card if you’re not able to get a traditional credit card.

Credit-Building Products That Don't Require a Credit Card

There are several credit-building products available that will allow you to build a credit history, even if you don’t qualify for a traditional credit card. Here are a few such products to consider:

  • Get a secured credit card. You’ll need to offer an upfront deposit on the card, but it can be a good way to start building a good credit history by making purchases on your card and then making regular payments. You’ll receive the deposit back when you close the account.
  • If you are a student, you may also be able to get a student credit card to help you build credit. Additionally, many credit card companies and banks also offer cards with lower limits to those building their credit. You may have to pay an annual fee for the card.
  • Apply for a secured loan. If you have any valuable asset, such as a vehicle, you may be able to use that as collateral to get loan approval. Secured debt usually comes with a lower interest rate. If you make regular payments on these installment loans, you’ll be able to establish a credit history.
  • Get a credit builder loan where the lender will place the full loan amount in a secure account. You’ll first have to make a payment each month and clear off the entire loan amount to get access to the loan funds. As the name suggests, these loans are specifically designed to help you build credit.  
  • Some banks and credit unions offer CD or passbook loans to existing customers against the balance they have in their savings account or CD. As you pay down your loan, you’ll be able to build credit. You can get access to the funds in your bank account once the loan is paid off.

Risks and Considerations

While there are several effective ways to build credit without a credit card, there are also a few risks involved that you should be aware of. You may overextend yourself by borrowing money that you don’t need simply to build credit.

If you borrow and are unable to make loan payments or miss payments, you’ll accumulate a lot of late payment fees. Over time, these may add up and make it even more challenging for you to pay off your debt. This will harm instead of helping your credit.

Another thing to keep in mind is that when shopping around for financial products that help you build credit, be mindful of interest rates and fees. Compare your options and ensure you’re getting the best possible deal. You don’t want to be stuck with a high-interest loan or buy now pay later financing option that you are unable to pay later.

The Bottom Line on Building Credit Without a Credit Card

Whether you are a young adult who is just starting out, a new immigrant, or someone who has stayed away from using credit, learning how to build credit without a credit card is crucial if you hope to get access to mortgages, auto loans, or any other form of credit in the future. Compare credit-building products and borrow only as much as you need. Once you borrow, ensure timely payments each month to reap the benefits.