It is an undeniable paradox. You’re supposed to get a credit card to build credit, but a credit card issuer may require a minimum credit score to qualify, and those required credit scores can sometimes be pretty high. So what do you do if you don’t qualify? How do you build credit without a credit card?
First, it’s important to understand what credit is, how it works, and why it matters. When a creditor extends you credit, there's an agreement that you'll repay the loan (or be allowed to borrow and repay money). Many creditors report your payment, and non-payment, activity to one, or all three, of the major credit bureaus: Equifax, Experian, and TransUnion. These credit bureaus store this information, collect additional information about you from public records, and sell the resulting credit reports to creditors.
Credit scores can help creditors quickly evaluate applicants and customers, as they attempt to predict the likelihood that a person will fall behind on a bill during the next 24 months. A higher score is better, as it indicates that the person is more likely to pay all their bills on time.
A good credit score is often required if you ever want to borrow money to make big purchases like a car or a house. Credit scores are based on the information reported to one or all credit bureaus, and they're created when someone requests your credit report. If the bureau doesn't have enough information, you'll be "unscorable". But, if you are scorable, most credit-scoring models have a score range of 300 to 850.
Key Takeaway: Building credit is essential
Credit cards are one of the fastest and most effective ways to build credit, and various credit card lenders offer cards for those with little to no credit, but that option may not be available to you. Fortunately, other credit building options can boost your credit score. They may not seem as simple as using a credit card, and some are a better fit for specific life circumstances, but they are viable options nonetheless.
Alternative credit building options include:
Various credit card companies offer cards for first-time credit builders, such as college students, as well as for individuals who are seeking to rebuild their credit, but these other options can also help boost your credit score.
"Credit builder loans make the most sense when you either can't get access to credit cards or don't trust yourself with one. They're best for anyone that wants to boost their credit score and does not want to risk getting into debt," says Jeff Zhou, founder of Fig Loans, a company that offers a payday loan alternative for credit building.
The purpose of a credit builder loan is to help those with no credit history build credit, or those with poor credit rebuild. A good credit score may not be required to qualify, but you must prove an income, ensuring the lender that you can afford to make your payments.
Credit builder loans are generally offered by credit unions, and are not widely advertised. If you are approved, your loan will be kept in a separate bank account and you'll make monthly payments until you pay off the loan. Only after you’ve completed your payments will that money be made available to you. Throughout your loan term, your payments can be reported to one or more of the major credit bureaus, which can help improve your credit scores.
If this seems like a good fit for you, Zhou adds that "the two biggest things to think about when choosing to use a credit builder loan are cost and control. A secured [credit] card is potentially a better option if you have the cash upfront and know you will never accrue interest on the card."
For those who are just starting out in building their credit, credit builder loans are a great option, also providing “training” in managing your money and making monthly payments.
An authorized user means that you are using someone else’s credit card, but are not responsible for payments. Even if you never use the card, that card’s activity can be reported to the credit bureaus under you name and positively impact your credit score.
This method may sound like a dream come true — use someone else’s credit card and not being responsible for making card payments. But it comes with risks. Make sure that you and the cardholder are committed to responsible use and payment on the card. Even if you never use the card, if the cardholder misses payments, this can be reflected poorly in your own credit score.
The authorized user method is a great option for parents helping a child build credit. Parents can place a child as an authorized user on the card, helping them build credit over time.
Personal loans can be a good option for building credit, but there are some caveats.
Many personal loan lenders have a minimum credit score to be considered for loan approval, but some lenders provide loans to individuals with low or bad credit scores. This is good news, but it’s a double-edged sword. The lower your credit score, the higher your interest rate will be, increasing the total amount to be paid back over time.
Making on-time payments can be a great way to positively impact your credit score, but the prospect of having much higher interest rates may not be the best option for you.
If you are in the market for a car, an auto loan can be an excellent way to finance your vehicle and build your credit. However, be mindful of subprime auto loans, which may appear to be a good option for borrowers with poor credit, but may have very high interest rates and unflexible terms.
To qualify for an auto loan, you may not be required to have an excellent credit score, as the loan is secured by the vehicle itself, creating less of a risk for the lender. In the long run, auto loans can have a positive impact on your credit score as you make on-time payments, which are reported to the major credit bureaus.
Peer-to-peer (P2P) loans are akin to borrowing money from your cousin or aunt. However, to avoid potential family drama, P2P lending involves websites that connect borrowers directly to investors.
Generally, individuals with low credit scores are accepted; however, there is a credit check involved with these services, pairing you with specific interest rates based on your credit worthiness. It is important to note that if you have a low credit score you will likely receive a high origination fee, in addition to at least 30 percent APR.
It is important to note that if you choose this method to build your credit, you must confirm that your lender reports payments to credit bureaus, so that you can have your timely payments reflected in your credit score.
If you have outstanding student debt, or recently took out student loans to pay for college, making on-time monthly payments can increase your credit score. This can be a great way for students to build their credit.
Both federal and private student loans can appear on your credit report, so no matter which type of loan you have, your on-time payments can reflect positively in your credit history.
Speaking to this point, Anna Serio, certified loans expert for Finder.com, shares her own experience building credit with student loans: “Credit cards are only one way to build your credit history. Before you take on a debt to build your credit, look at the debt you have — or might have in the near future.
If you have student loans, that might be enough to get you started. Personally, I built my credit history on student loan repayments from a graduate degree and gave it a boost by adding a credit card in the mix about three years later.”
Making on-time mortgage payments is one of the best ways to build credit. However, depending on your circumstances it could be difficult to qualify for a mortgage in the first place if you have a low or damaged credit score.
It is possible to get a mortgage without a credit score, but everything is in the hands of the lender to determine your eligibility based on their requirements. Other factors that they might look at, instead of your credit score, might be past rent payments and money in savings.
If you are able to get a mortgage without a credit score, it is a great way to build credit, but qualifying might be very difficult for some individuals, and therefore may not be an available option.
Recording your rent payments can positively impact your credit score. However, many landlords don’t report payments, and so you must ask if they will report that information.
If your landlord agrees to submit your rent payment history, credit bureaus can include it in your credit report.
Generally, credit scoring is only based on your borrowing activity, either through loans and/or credit cards. However, some additional payments can be included in your credit report, such as cable, internet, or your monthly phone bill.
Although this method doesn’t necessarily offer credit building certainty, Brandon Neth, credit card and travel rewards expert at FinanceBuzz says that it’s still a good option, and offers some practical advice in making it work: “If you pay utility bills, your cell phone bill, and other similar bills, you can take advantage of the new Experian Boost feature that can help you establish credit as well. Be sure your social security number is attached to these bills.”
Through services like Experian Boost, you can submit alternative payment data to boost your credit score. From your utility bill to your monthly Netflix bill, you can use these payments as a means to boost your score, by connecting your bank account(s) to Experian Boost.
After doing so, you could see an increase in your credit score. It may not be a large increase, and it will only help you if a creditor checks your Experian credit report with the Boost data and agrees to use that score.
If you would like to build your credit with a credit card there are options available to you in secured credit cards or student credit cards.
Secured credit cards are a great option for those with damaged or very poor credit. Secured credit cards vary from unsecured credit cards (the credit cards that we all know and love, at least most of the time) in the fact that the applicant must make a security deposit, which is held as collateral until the account is closed. This security deposit also becomes your line of credit, providing the lender with security if you were to miss or fail to make payments.
Various credit card issuers offer credit cards to those with no credit, or those who are looking to rebuild their credit. Here are the top three credit card companies on BestCompany.com that have services for building or rebuilding credit through secured or student credit cards.
It is important to note that not all companies offer secured or student credit cards.
With the Secured Mastercard® from Capital One®, borrowers can build or rebuild credit for a $0 annual fee and a 26.99 percent variable APR. A security deposit of $49, $99, or $200 is required, providing an initial line of credit of $200. These deposit requirements are low compared to the industry average.
Capital One also offers the Journey® Student Credit Card, allowing students to build credit while receiving rewards and 1 percent cash back with a $0 annual fee.
Capital One offers additional credit cards for fair credit.
Capital One Customer Review: Jim Fannon
"Rebuilt my credit using [a Capital One] card. Started with a very low limit and now it has grown to more than I will ever use."
Read pros and cons, and more customer reviews, about credit cards through Capital One.
The Discover it® Secured Credit Card is another great option for building or rebuilding your credit with a $0 annual fee, and a 22.99 percent variable APR. You choose your own refundable deposit amount, which must be at least $200 and becomes your credit line on the card, if approved.
Discover also offers two cards for college students looking to build their credit. Both cards offer cash back on certain purchases.
Discover Customer Review: Ariana Key from Tallahassee, Florida
"I recently opened a Discover card to start building credit. I am a college student and having good credit is very important. Discover has made it incredibly easy to track spending, use my card anywhere, and build my credit."
Read pros and cons, and more customer reviews, about credit cards through Discover.
The Citi® Secured Mastercard has a $0 annual fee and a 22.49 percent variable APR, and is ideal for customers with little to no credit history. A security deposit of at least $200, which becomes the card’s credit limit (available credit limits are between $200 and $2,500).
Citi also offers the Rewards+ Student Credit Card, which allows students to collect points on small purchases.
Citi Customer Review: Ashley from Pleasant Grove, Utah
"Citi credit card was my first credit card. They had an unbelievable beginning APR rate. It was a great way to establish my credit history and put me on my way from college. The student card even gives great rewards! It is a very reliable and trusted company which is important to me."
Read pros and cons, and more customer reviews, about credit cards through Citi.
There are so many options for credit building without a credit card, make sure you take a look at your personal circumstances to choose the best option for you. If you decide to look into credit card companies for credit building credit cards, the other outlined options can help you increase your credit faster, setting you up for greater financial success in the future.
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