I know you may be questioning if it is even possible to build your credit score without a credit card. I vividly remember feeling this same way. I was 17 years old and my mom sat me down and talked to me about the importance of having credit. I assumed there was no other way to do so without getting a credit card.
Credit cards offer a great way to building credit. When used the right way, they can positively impact your credit score. However, not everyone wants a credit card or may have trouble qualifying for one due to previous bad credit history, or no credit at all. If you are in this situation, don’t worry. There are actually a number of ways that you can build your credit without using a credit card.
Why Do We Need Credit?
Credit makes it possible for consumers to borrow money for a house, car, or any other financial decisions. Rental companies will often look at your credit report as well. Simply put, your credit score determines how and what you will be able to afford. Unless you have indispensable income for all of your purchases, you will need to develop a credit score.
Here Are Different Ways to Build Credit Without A Credit Card:
1. Get a Credit Builder Loan
A credit builder loan is when a lender puts money into a savings account for you. However, you will not be able to access the money until the amount they gave you is paid off over time through fixed payments. These loans range anywhere from $300-$1,000. As a result, the lender will report the payments you made to the credit bureaus, building up your credit report. This is building up your payment history which accounts for 25% of your overall credit score history. The only downside to a credit builder loan is that it does have interest that you will have to pay.
Credit Builder Loan Options
3. You are also able to go to your local bank or credit union and inquire if they offer a credit builder loan.
2. Apply for a Secured Card
Using a secured credit card is one of the best ways to build your credit. A secured credit card works by supplying the card issuer with a cash deposit in advance. In other words, if you put $200 into the card, you will have $200 to spend. This allows you to make purchases and payments while building credit. After a period of time, some of the credit companies may offer credit increases as well. Furthermore, I have included some of the secured credit cards that are common, including the Discover Secured card which even offers cashback on purchases.
- Capital One Secured Mastercard
- Easy to qualify for
- 26.99% variable APR
- $0 annual fee
- For people who are new to credit and do not have a poor credit score
- OpenSky Secured Card
- You set your own credit limit based on your deposit. This amount can be anywhere from $200-$3,000.
- Has an annual fee of $35/ year
- Does not perform a hard inquiry into your credit score when applying
- Discover Secured Card
- Each 2% cashback on eligible purchases
- For people who are new to credit or are looking to rebuild their credit
3. Personal Loans
As long as you make payments on time and pay the loan back in full as soon as possible, personal loans are a great way to help build credit. Personal loans, however, do tend to have high APRs. Before taking out a personal loan, check with the bank or credit union to ensure that you meet the criteria to borrow the loan. Some banks will take the money directly from your account every month, which will help your score it will build your payment history.
4. Report Your Rent Payments
First, ask your rental company if they report timely payments to the credit bureau. While some landlords may not report your monthly rent payment, there are other sites that can do this for you. Such as Pay Your Rent, Credit My Rent, or Rent Reporters. While some of these services do include an additional charge, it may be worth it to show consistent payments.
5. Become an Authorized User
An authorized user is when you become a user on someone else’s account. An authorized user will have access to the credit card, in other words, their line of credit. To be an authorized user, they will not perform a credit check. You are able to make purchases on the card and payments, which are all reported to the credit bureaus. This saves you the trouble of having to apply for your own line of credit. This should be a person that you trust to make payments on time. If the person in charge of the account misses any payments or spends beyond the credit limit, your score will also be impacted.
6. Peer To Peer Loan
This is a great option if you are unable to get a loan from the bank. A peer to peer loan is essentially when an individual can obtain a loan from another individual, without using a financial institution as the middleman. However, the interest rates for these loans can be high. These loans are reported to the credit bureau. As long as you make the payments on time, your credit score will improve.
7. Pay off Student Loans or Other Existing Loans
Over time, student loans or other existing loans will help you build your credit. Your overall credit rating will improve if you make your payments on time. It is important that you do not default on these loans as this is known to negatively impact your credit score.
Tips on Achieving Good Credit
1. Make Payments on Time
One of the best ways to boost your credit is to ensure that you make your payments on time. This will avoid any late fees that are charged but will also show future lenders that you are consistent with your payments. I suggest setting up automatic payments so that you are guaranteed to never miss a due date.
2. Keep A Low Utilization
It is recommended that you use less than 30% of your credit limit to be in a healthy range. If you utilize all of the credit that is available to you, this will take longer to build your credit as there is a high ratio between the amount of money that is available and the amount of money that you have spent.
3. Build Up Your Credit History
This accounts for 15% of your total score. I suggest getting starting to build your credit history as soon as possible. The sooner that you start to show a history of making payments on time and keeping your utilization below 30%, the better that your credit score will be.
Whether you have bad credit or you are looking to build your credit, consider the options that are listed above. Most importantly, be sure to make payments on time and keep your utilization at 30% or lower. Without the use of a credit card, you are still able to build your credit and therefore make your life easier for bigger financial purchases in the future.