How to build credit without a credit card
7 min read
January 29, 2023 • Spruce
These days it’s tough to rent a car, book a hotel or even use some rideshare and delivery apps if you don’t have a credit card. Trouble is, most credit card issuers won’t give you that piece of plastic if you don’t have a credit score — and the common way to build your credit score is with … a credit card. Which may leave you wondering how to build credit without a credit card.
Whether you have no credit or bad credit, it can be frustrating to think you can’t build a good credit score because you don’t have a credit card … because you don’t have credit.
But no need to stress! There are many ways out of that apparent maze. In fact, it’s possible to earn a solid credit rating without a card. We’ll outline how to build credit — but first, it’s important to understand what your credit score is all about.
What your credit score means
Your credit score is a snapshot of your credit history at a certain point in time, calculated by credit bureau algorithms. The three major credit bureaus — Equifax, Experian, and TransUnion — use different scoring models based on FICO, but they’re all similar. Scores range from 300 to 850, and a score over 700 is generally considered good.
Your score can change frequently based on the activity reported to your account.
For example, credit reports and scores factor in things like:
- Monthly payment history
- Changes to your credit mix (ex. types of credit like credit cards, car loans, etc.)
- The age of your accounts
- Your balances
- Your credit utilization, and even how often you apply for new credit.
Lenders typically report to the bureaus once a month. Note, however, that a late payment can lower your credit score for as long as seven years, even after you pay the bill — although credit bureaus will erase late payments on medical bills as soon as you pay off the debt.
Let Spruce help you keep tabs on your credit score. With the Spruce mobile banking app, you can see the latest updates to your credit scoreand easily learn what’s affecting it.
Related: What is a good credit score
6 ways to build credit without a credit card
Good credit card habits, like paying your bills on time, are the most common ways of building a credit score, but you have other options. Read on to learn more about how to build credit without a credit card. Most of the solutions involve workarounds like secured loans or co-signer agreements.
A quick heads up — just be careful not to apply for too much credit all at once. Doing so creates “hard inquiries” that can lower your score: The credit bureaus worry you’ll take on too much debt and be at higher risk of default.
1. Secured credit card
A secured credit card typically requires you make an advanced deposit into a savings account and that becomes the credit limit of how much you can charge or draw from the loan. Essentially, the amount you deposit in the savings account is “securing” your credit card and preventing you from going over your credit limit And, as a result, using the card could improve your credit score, especially when you’re making timely payments.
Depending on the card issuer, after six to 18 months with a secured card you may even be eligible to upgrade to a conventional unsecured credit card. If you do end up being approved for a conventional credit card, be sure to stay on top of your payments, so you don’t accumulate too much credit card debt.
2. Credit builder personal loan
Similar to a secured credit card, a credit builder personal loan requires you to put the full loan amount on deposit with the bank. You make timely payments (which includes interest and fees) until the loan is paid off, then you get your deposit back. It may take a while to save enough for the loan, but ultimately the process allows your monthly payments to be reported to credit agencies, which is what helps you build your credit.
Credit builder loans are typically offered by community banks and credit unions as well some online banks. Interest rates can vary considerably, so shop around.
3. Co-signer agreement
Consider applying for a personal or auto loan with a co-signer. That could be a parent or other relative with good credit history. They guarantee the loan — meaning that if you don’t pay, they’ll be on the hook. Plus, if you don’t keep on top of your payments, it could mean a negative hit to your credit as well as your parent’s or friend’s credit.
Make sure your co-signer has an excellent credit history before you apply. Otherwise, the loan could be denied, and your credit score could drop just for making the application. (Remember, credit bureaus don’t like to see a lot of loan inquiries.)
4. Authorized card user
Often you can get a credit boost by becoming an authorized user on someone else’s card account, such as a parent or close friend. You don’t need to make charges yourself, or even possess the card; just having your name on the account can elevate your score. (Again, make sure the account is in good standing before you ask to be added.) Being an authorized user can fit well into a plan for college student budgeting.
Not all credit card companies report authorized users to a credit reporting agency. So, if you’re considering this route, the primary card holder should call the issuer first. It’s also smart to check your credit rating with all three bureaus after using the card for a few months. That way you can make sure the card is appearing in reports.
You can use www.annualcreditreport.com to check your credit report for free.
5. Installment loans
Auto, mortgage, personal and student loans are all types of installment credit that can be a good way to build credit without a credit card. Monthly payments paid on time and over time can help you build credit and increase your score.
For auto loans specifically, the car itself serves as the collateral for the loan since the bank can repossess it if you miss payments. That means you generally won’t need a long credit history to qualify. However, people with low or no credit sometimes pay higher interest rates. And it’s usually best to limit how much you borrow for a car, even if it means driving an older model.
Related: How much should I spend on a car?
6. Rent and utility bills
It’s possible to build credit just by paying your regular bills on time. Many property management companies automatically report your rent payment to credit bureaus, but individual landlords usually don’t. Some credit bureaus have programs to add your rent payment history to your score calculation if you ask. Utility and mobile phone payments can also be included.
Related: Determining how much rent you can afford
How long does it take to build credit?
It usually takes about six months of credit activity to establish enough history to generate a credit score. After all, good things take time! During that period (and going forward), don’t forget to make all your payments on time.
Even if you’re not yet eligible for a credit card, try to establish a mix of credit accounts, which is another factor in your score. “Credit accounts” just means types of accounts, so that might include one secured credit card, installment loans, and your utility accounts.
Note that while a mix of credit accounts is good for your credit score, too much debt is bad. Generally, your total monthly debt payments, including housing costs (rent or mortgage), should be no more than 30% of your take-home pay. If they’re higher, you may lose credit score points.
Keep tabs on your credit score with the Spruce mobile banking app
Once you understand how to build credit without a credit card, monitor your credit report and dispute any errors. And don’t forget, with the Spruce mobile banking app, you can easily check your FICO5 credit score whenever you want.
Plus, Spruce offers other features, such as overdraft protection up to $20. and cash back rewards that can help you on your way to getting better with money day by day.
This information provided for general educational purposes only. It is not intended as specific financial planning advice as everyone’s financial situation is different.
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