7 techniques for how to build credit without a credit card
What comes first, the credit card or the credit score?
Contributing Writer at Tally
June 4, 2020
If you're new to credit or haven't indulged in borrowing money in the past 7-10 years, there's a good chance you have no credit history or credit score. This means there isn't enough data on your credit file to compile a score. To a lender, though, it means you're a mystery.
As a financial mystery, you represent a big risk to a lender. This can result in rejection after rejection when applying for credit.
A relatively quick way to build credit is through careful credit card use, but many credit card issuers won't offer their services to someone with no credit score.
There are several ways to build credit without a credit card. We'll explore these options below, but let's first take a look at what a credit score is and why it's so important.
The credit score and why it's important
A credit score is how lenders measure how trustworthy you are with a loan or another financial obligation. This score is compiled based on your financial life over the past 7-10 years, including your payment history, total amount of debt, types of credit accounts and amount of credit card debt relative to your available balance.
There are multiple credit scoring models, but the most common model is the FICO score. There are also multiple scoring models within FICO, including:
FICO Auto Score
FICO Bankcard Score
FICO Score 4 (for mortgages)
FICO Score 8
FICO Score 9
FICO Score 8 remains the most common model as of May 2020.
The base FICO scores — FICO Score 8 and 9 — range from 300 to 850, while industry-specific models range from 250 to 900.
A credit score is important because it not only plays a big role in whether a lender will approve you for a loan or a credit card, it also helps lenders create their loan or credit card terms, including the interest rates and fees.
Having no credit score can present the same approval issues as having bad credit, which is why it's so important to understand how to build credit without a credit card.
How to build credit without a credit card
When you turn 18 years old, the world opens up and new opportunities present themselves. One such opportunity is building your credit report and credit score. Technically, both follow you from birth to death, but you have nothing on your credit report to create a credit score until you start taking on debt, which you can start legally doing at 18.
Most 18 year olds can attest to the struggles of getting approved for anything credit-based before building a credit score. This creates a bit of a chicken-or-egg quandary: You need debt, like a credit card, to build credit but can't get approved for a credit card without credit.
You can crack this credit code with these seven techniques for building credit without a credit card.
1. Become an authorized user
Most credit card issuers allow primary credit card holders to add authorized users to their accounts.
The primary credit card holder is the main owner of the account. They receive the monthly statements, are responsible for the payments and control all the critical parts of the account, such as mailing addresses, adding and removing other authorized users, requesting credit limit changes, accessing credit card rewards and much more.
When a primary credit card holder adds an authorized user, they’re giving the user authorization to use the credit card for purchases and access some of its more basic features and perks. The authorized user often receives a credit card in their name, too.
The key distinctions for authorized users are they generally receive no monthly statements and can’t make critical changes to the account.
Because of the access an authorized user has to the credit card account, there is a level of trust involved. This is why an authorized user is generally a close friend, spouse, family member or long-term partner of the primary credit card holder.
By becoming an authorized user, you may get a quick boost to your credit score, as many credit card issuers report authorized users to the three major credit bureaus: Experian, Transunion and Equifax. This may not have the same impact as having a credit card in your name, but it can be the boost someone with no credit needs to get started.
The downside to being an authorized user is it may also hurt your score if the cardholder exceeds a 30% credit utilization ratio on the card or misses a monthly payment. Plus, not every credit card company reports authorized users to the credit bureaus, so it could prove fruitless.
2. Credit-builder loan
Credit-builder loans are great options for first-time credit seekers. A credit-builder loan is generally for $1,000 or less, and they have looser approval requirements that look beyond your credit score. These approval requirements can include sufficient income, no late payments for a specific amount of time, or a checking or savings account with the lending bank or credit union.
Credit-builder loans are available through multiple financial institutions, including traditional banks and credit unions, online lenders and peer-to-peer lenders. Keep in mind, though, not all lenders offer them, so you may need to shop around to find one that fits your needs.
As you make on-time payments on a credit-builder loan, you'll finally get that credit score you've been seeking and see that score steadily increase over the course of the loan.
There are also downsides to credit-building loans:
Relatively high interest rate compared to other personal loans
Shorter repayment terms
Small loan amounts
Not all banks and credit unions offer them
3. Student loan
If you head off to college, it's common to apply for student loans. Like a personal loan, student loan lenders report the loan to the credit bureaus. That said, the lender won't start reporting monthly payments to your credit history until you've left school and entered the repayment phase of the student loan.
A student loan may not help while you're in school, but if you've graduated or are near graduation, you'll soon start building a credit score and see it rise as you make on-time payments.
4. Auto loan
As a secured debt, auto loans are generally more flexible about approving applicants with no credit, as the chance of financial loss for the lender is lower. The lender reduces the risk of financial loss by securing the loan with the vehicle. If you default on an auto loan, the lender can repossess the vehicle, resell it and recoup some of the costs.
The downside is not all lenders will approve you without a credit score, so you may have to shop around to find an approval. In some cases, you may have to show a lower-than-normal debt-to-income ratio, pay a larger down payment or get a co-signer to get approved.
Once you get approved for a car loan, you’ll start building credit and seeing your credit score increase as you make your monthly payments on time.
5. Certificate of deposit loan
A certificate of deposit (CD) loan, like a car loan, is a secured debt. Instead of having a vehicle securing the money you borrow, a CD loan uses the money you have in a CD savings account — a fixed-term account with a higher interest payout — to mitigate the lender's financial risk. If you default on the loan, the lender seizes and liquidates your CD account to pay off part of or the entire loan.
This secured personal loan is easier to get approved for thanks to the existing relationship you have with the bank and the liquid cash you have to secure the loan. This lower risk may also help reduce the loan’s interest rate.
One downside is you must have an existing CD account with a bank or open one and leave it open for a specified amount of time before taking out the loan. Also, the interest rate the loan charges is typically more than you'll earn from your CD.
6. Paying rent
Paying your rent on time could help give you that initial credit score you need and the ability to build your credit history over time. The three major credit bureaus will report on-time rental payments, so long as your landlord reports them. The problem is, many landlords don't take the time to report your rent payments.
Fortunately, there are several newcomers in the personal finance industry that are moving rent payment reporting forward by working with your landlord to get payment history and reporting it. Some companies even claim up to a 40-point increase to your credit score in 10 days.
The downsides are these companies generally charge you monthly and annual fees and require your landlord's participation in the verification process. To avoid these fees, you can also speak with your landlord and tell him about your goal to build your credit score. After understanding what you’re looking to accomplish, your landlord may be willing to report your payments without bringing a costly third-party into the mix.
7. Paying other bills
Though a traditional credit history includes only debt, the digital era has ushered in new ways for credit bureaus to help determine your creditworthiness. This is where Experian Boost comes in, as it connects to your bank account and checks for regular utility bill payments, including cell phone, electric, water and others.
Once it identifies a regular utility payment, it adds these as on-time payments to your credit report. If you have no credit score, these on-time payments can provide a score without you taking on any debt.
The only downsides to Experian Boost are that you must activate it and connect a bank account. It doesn't always increase your credit score, as these payments may not have a large enough impact to move your score upward.
Now's the time to start building credit
Building credit can sometimes leave you wondering where to start, as you often need a good credit score to get credit, but it can be difficult to build a credit score without credit cards. Fortunately, there's a handful of ways to build credit without a credit card, including auto loans, student loans, credit-building loans, rent payments and even just payments on your monthly bills.
With so many options to build credit, it's now up to you to pick a credit-building process — or a combination of a few — that's right for your financial situation.