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How to Build Credit Without a Credit Card

Written by Banks Editorial Team

Updated February 14, 2024​

7 min. read​

Some people view credit cards as the only way to help build credit because of their simplicity. Most credit card companies send payment history to the three major credit bureaus, allowing you to rack up points with every purchase, ranging from holiday shopping to buying groceries and gas. Credit cards work great for many people, but it is possible to incur debt and deal with a high-interest rate. These cards aren’t for everyone, especially those who want to avoid debt, and you shouldn’t feel pressured to use a credit card solely to build credit. 

Want to grow your credit and stay away from credit card debt? We will discuss alternative ways to build your credit.

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Is Your Credit Score Important? 

Your credit score is an important number. This score impacts loan amounts, interest rates, and monthly expenses. In addition, lenders look at your credit score and other information before giving you a mortgage or auto loan. So, a high credit score may increase your chances of getting approved.

Borrowers with poor credit may resort to payday and title loans to cover emergency expenses. These loans may have high-interest rates, which means if you make minimum payments, you will be paying back more than you would with a lower interest rate. A high credit score can give you better opportunities, and you could get a better interest rate.

A credit score can impact your finances even if you do not seek a loan. Landlords may look at your credit score before letting you live on their property, and other entities like insurance companies do the same. Credit scores help landlords, and others gauge someone’s level of risk. Consumers with low credit scores are less likely to keep up with the monthly rent payment. You can only have a low credit score by falling behind on payments and mismanaging your debt. Having no credit history isn’t as bad, but creditors don’t know whether they can trust you or not since they haven’t seen you in action.

Why Is Credit Building Important?

Credit building improves your credit score through various actions, such as paying debts on time and keeping your balance low. Consumers build credit to get more attractive interest rates and possibly higher loan amounts. Raising your credit score could put you in a better position to secure a mortgage or auto loan.

While most people view credit building as a way to get better loan terms, it also implies good financial habits. Good credit building puts you closer to a debt-free lifestyle. The credit-building journey encourages good behavior and quickly repaying your financial obligations.

Credit Card Alternatives to Build Credit

Credit card companies report your payment history and debt to the credit bureaus. On-time payment history helps improve your credit score, but you could risk racking up serious debt. The debt can become unbearable, and if you are no longer able to make payments, you could damage your credit score. Making the minimum payment will keep your account in good standing, but your debt will balloon and result in an unfavorable credit utilization ratio, a component that affects 30% of your score. As a result, some people prefer to stay away from credit cards to avoid risky scenarios such as debt accumulation.

If you still want to help build your credit score, you’re in luck. It’s possible to build a credit score even if you don’t have a credit card. You can demonstrate a strong on-time payment history and responsible debt management without using a credit card.

Ways to Build Your Credit Without a Credit Card

Credit cards aren’t the only way to help boost your credit score. We have highlighted some strategies to help build credit without a credit card.

Consider a Personal or a Car Loan

Taking out loans and ensuring that you pay them on time strengthens your payment history. Payment history is the most critical credit category since it makes up 35% of your score. Most lenders will report your payment history and debt to credit bureaus. You might pay a higher interest rate on these loans if you have a lower credit score, but if you take out a small personal loan, you won’t feel the interest rate as much. Personal loans are installment loans that you pay for each month. You will build your FICO score since each monthly payment will show up on your credit report.

A car loan is a longer-term commitment than most personal loans, but you can still get out of a higher interest rate. Once you build your credit, lenders will help you out with future loans. They will give you lower rates and let you take out more money. This advantage doesn’t only help you if you apply for a personal loan in the future, but you can also save on your current auto loan. Many borrowers refinance their loans after building their credit. A refinance swaps your old loan for a new one that more accurately reflects your current credit score and financial situation. Lowering the interest rate by a single percentage can save you thousands of dollars over the loan’s lifetime.

Become an Authorized User

Even when you don’t want responsibility for your own credit card, if you think it’s the best way for you to improve your credit score, you can become an authorized user of a friend or family member’s credit card if their card’s terms allow this. The cardholder’s activity may impact your credit score, helping you reap the benefits of a credit card without owning one. It is always best to make sure you read the terms or ask questions to make sure that it could benefit your credit as well. Some people use this strategy to help build their credit and qualify for a credit card later. It’s a less stressful way to build credit if you are nervous about paying your bills on time but want to get a mortgage in the future.

The authorized user strategy only works if the primary cardholder is financially disciplined. If the cardholder makes on-time payments, your credit score could increase. However, a primary cardholder’s late payments and higher debt might hurt an authorized user’s credit score. Your credit score’s movement typically depends on the primary cardholder’s actions. So only become an authorized user if you trust the primary cardholder’s financial judgment.

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Get a Credit Builder Loan

A credit builder loan is exactly what it sounds like a loan that can help build your credit. The lender reports your payment history to the major credit bureaus. Credit builder loans differ, but typically you receive some of the loan’s proceeds immediately, and the remaining funds get stored in a reserve account. After paying off the loan, you’ll get access to the money sitting in the reserve account.

Most of these loans are small. Lenders typically let you take out a loan between $500 to $1,000, which is payable within 6-24 months. A lengthier term reduces your monthly payments but keeps you in debt longer, while a shorter loan term increases your monthly payments but gets you out of debt sooner. A higher monthly loan payment can build your credit score faster since it indicates you can manage higher financial obligations. However, you should not risk showing a late payment if you are nervous about making the elevated monthly payment of a 6-month loan compared to a 24-month loan.

Get a Phone Plan

Most people use a smartphone and are on a phone plan, and that plan can improve your credit. You can arrange for your phone plan fees to get reported to the major credit bureaus. That way, creditors and other parties will consider your phone plan payment history when deciding on things like your loan terms and tenant application.

Continue to Repay Existing Loans

Any loan repayments could help improve your credit score. You may have taken out federal student loans to pay for your tuition, and this is a great area to start if you want to build your score without applying for a credit card. Of course, you shouldn’t take out student loans just to build your credit score, but if you have them, you are obligated to make payments, and each on-time payment will help your score.

 Each repayment demonstrates your ability to manage debt. If you fall behind on payments, come up with a plan to catch up or call the loan originator to discuss alternate arrangements. Lowering expenses and picking up a side hustle could also help close the gap in your obligations. You don’t want to take on more debt than you can handle. Effective budgeting and on-time loan repayments could help strengthen your credit score.

Report Alternate Payments and Rent Payments

Monthly rent payments are similar to monthly mortgage payments. They both show your ability to make consistent payments and stay on top of your expenses. You can ask your landlord to report your rent payments to the three credit bureaus. If the landlord does not report your rent payments, you can contact credit agencies and report your rent payment history, and you can follow the same approach with alternate payments. Creditors have recognized more types of payments, such as student loans, TV bill payments, and more. Each of those reported payments can give you an edge and help you qualify for better loans when you need them.

Keep Your Credit Utilization Rate Low

Your credit utilization ratio makes up 30% of your credit score. This rate measures the percentage of credit you are currently using. For example, if you have a $10,000 line of credit and are sitting on a $1,000 debt, your utilization ratio is 10%. A ratio under 10% is ideal, but a credit utilization ratio below 30% should still improve your credit score. If you pay off debts on time and don’t spend more than you can afford, your credit utilization rate will decline. A decreasing credit utilization rate paves the way for a higher credit score and less financial stress. 

Use a Secured Credit Card

Nervous about using a traditional credit card? A secured credit card gives you the same credit-building advantage without as many risks. These credit cards have lower credit limits that depend on your refundable security deposit. Most people take out secured credit cards because they cannot qualify for traditional credit cards and want to repair their credit. Most credit card issuers set your credit limit based on your security deposit. 

You will have to put down at least $200 for most issuers, but you can put more down to increase your limit. You will receive this security deposit back if you close the card (not recommended because it hurts your credit age) or demonstrate responsible use. Most issuers give you the security deposit after converting your secured credit card to an unsecured credit card, but some issuers give you the money back before you make that switch.

Secured credit cards typically have higher interest rates and fees than traditional cards. However, they present a lower barrier of entry since most issuers do not have credit requirements to obtain one of these cards. They are useful starter cards that you can swap in for a traditional card in the future.

The Current Build Card is a secured card by Current that helps you build your credit history as you spend. It’s designed to keep you out of debt, as spending is capped at the amount you deposit into your Current Spend account, and there is no minimum required deposit amount to open an account with Current.

Aside from this card to help you build credit, the Current mobile app also offers tools to track your spending, set savings goals, and offer up to a 4.00% bonus to help you save even more. To learn more about Current, visit their website to open an account.

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