It's no secret that building a good credit score is essential to facilitating certain financial transactions. However, many people mistakenly assume you need credit cards to build credit. Since this couldn't be further from the truth, it's time to shatter this common myth with four clever ways you can boost your credit score sans plastic.
The best methods for building credit without a credit card include taking out credit-builder loans, consolidating debt with personal loans, reporting rent and utility payments, and opening store accounts. Each approach has its own pros and cons, so it's crucial to assess your options.
In this post, we'll break down these effective strategies so that you can make confident, informed decisions about your finances. But let's clear up the answer to a relatively pressing question before we dive into the nuts and bolts of how to build credit without a credit card.
Can You Build Credit Without A Credit Card?
As we creep closer toward a cashless society, it's no surprise that a recent survey by the Federal Reserve Bank reveals 70% of people own at least one credit card. There are 2.8 billion cards in use worldwide. Nearly half of those are in the U.S. alone.
Credit cards are great for the sake of convenience, but many individuals also believe you need one to build a good credit score for obtaining loans, securing a mortgage, and qualifying for lower interest rates. It's something most of us get taught fairly early in life.
So you wouldn't be out of line if you're asking whether it's even possible at this point.
Here's the thing:
Anyone applying for their first credit card will soon discover that getting approval requires a qualifying credit score.
This then raises a frustrating question: how are you supposed to build good credit with a credit card if you can't get a credit card without first having good credit?
The conundrum is REAL.
Thankfully, it's one that's easily solved.
While opening a credit card, maintaining a credit utilization ratio below 10%, and paying the account off every month is the fastest way to build your credit score from zero, credit cards are not the only option.
Whether you're starting from scratch, you're rebuilding credit after poor money management decisions tanked your rating, or you simply don't want a credit card, the credit-building strategies outlined below can help you achieve your goal.
No tricks. No scam-like tactics. And definitely no traditional bank-issued credit cards.
Yes, it's true. You really can build credit without a credit card. However, it's important to understand that building credit doesn't happen overnight, no matter which route you take.
Keep reading: Unsecure Credit Builder Loans
How Long Does It Take To Build Credit Without A Credit Card?
Quick and dirty: building credit takes at least six months of reported payment history. Building good credit, which is defined as a score of 670 or above, can take years. Late payments, liens, defaults, and bankruptcies can delay this process even further.
This estimated timeframe is based on FICO—the most popular model for credit scoring. Although other credit-scoring systems exist, FICO is by far the most widely used by financial institutions and top lenders.
The model distinguishes credit score ranges as follows:
- Poor: 300 to 579
- Fair: 580 to 669
- Good: 670 to 739
- Very Good: 740 to 799
- Excellent: 800 to 850
"How is my credit score calculated," you wonder.
FICO uses five key factors to determine a person's score. Each element holds a different weight, so we've thrown them into a pretty pie chart depicting their influence on your overall rating:
(Data Source: Investopedia)
- Payment history refers to the record of your payments on credit accounts and other debts. As the most important factor influencing your FICO credit score calculation, consistency in making payments on time every month is essential to building a positive history.
- Credit utilization is the amount of money you owe versus your total available credit. This percentage tends to fluctuate as you make purchases and payments, but ideally, you'll want to keep this below 30%. For example, if you have $10,000 available in credit, the balance owed shouldn't exceed $3,000.
- Length of credit history takes into consideration the age of your account. A longer credit record is seen as less risky because there's more data on your history of making payments.
- Credit diversity relates to the different types of credit you use. This includes revolving credit products like credit cards, as well as installment credit, such as a mortgage or car loan. While having each type isn't required, successfully managing a variety of credit accounts can improve your score.
- New credit factors in hard inquiries (i.e., how many new accounts you've applied for recently), how many new accounts you have, and when your most recent line of credit was opened. Every new application potentially creates a hard credit check, which can ding your credit score by a few points. If you want to build your credit, refrain from applying for too many accounts within a short period.
Another consumer credit rating system that employs similar criteria to determine your score is VantageScore. Developed by Experian, Equifax, and TransUnion—the top three credit reporting agencies, VantageScore also generates a score on a scale of 300 to 850 points.
Anyone with a FICO score below 670 or a VantageScore below 660 is classified as a subprime borrower. This not only makes it harder to obtain loans but also increases your interest rates.
You can request a free credit report once a year from sites like AnnualCreditReport.com. Keep in mind that establishing a good credit score will require discipline and lots of patience.
With that said, let's explore how to build credit without a credit card as quickly as possible.
What Is The Best Way To Build Credit Fast?
Although this is by no means an encyclopedia of credit-building methods, the strategies covered below are some of the best ways to get the ball—or in this case, your credit score—rolling. You'll find it's easier and faster to hit a good baseline in the next six months if you're starting from the ground up versus repairing a damaged credit report. The good news is there's hope in both circumstances. So, without further ado, let's get going.
1. Apply For A Credit-Builder Loan
Designed specifically for people with low to no credit, a credit-builder loan is unlike a typical loan in that you don't walk out of the bank with cash in your pocket. Instead, lenders put the total value of the credit line into a secure account which you then pay off in fixed installments each month. Once you pay the amount in full, the lender releases the funds to you. Think of it like a savings account you can't draw from, but all deposits are reported to the credit bureaus.
The appeal of a credit-builder loan is that lenders don't require a good credit rating for approval. In fact, many of them don't even conduct a credit check. What they do require is proof that you have sufficient income to cover the installment amount.
So, what can you expect?
Credit boost: According to a study conducted by the Consumer Financial Protection Bureau (CFPB), a credit-builder loan can increase your score by as much as 60 points if you don't have existing debt.
Credit-builder loan requirements: To get a credit-builder loan, you may need to provide employment verification, proof of income, information about existing debts and savings, and other personal details to help verify your ability to pay and authenticate your identity.
Where to apply: You can apply through community banks, credit unions, online credit services/apps, and peer-to-peer lenders. Not all credit-builder loans are created equal, though, so it's important to shop around for the best rates and loan terms. Ensure that you're also aware of any set-up fees or hidden charges, such as account closing fees.
Here's a list of some of the most popular providers, along with a high-level overview of their available loan amounts, annual percentage rates (APR), and loan repayment terms.
|Lender||Loan Amount||APR||Loan Terms|
|Credit Strong||$1,000–$10,000||7.75%–13.50%||12–120 months|
|Digital Federal Credit Union||$500–$3,000||As low as 5%||12–24 months|
|Metro Credit Union||$500–$3,000||Starts at 4.10%||Up to 24 months|
|MoneyLion||Up to $1,000||5.99%–29.99%||12 months|
|Republic Bank||$500–$1,500||5.373%–8.055%||12–24 months|
- With relatively lax qualification requirements, it's easier to get approval for a credit-builder loan than a personal loan.
- If you don't have existing debt and you make payments promptly every month, you can expect to see a pretty decent bump in your FICO score after the loan is paid in full.
- When the loan term ends, you have a nice stack of Ben Franklins coming your way. This cash can feel like a sweet reward for all your hard work.
- Credit builder loans can make it easier to qualify for a mortgage, buy a car, or get a credit card with a lower interest rate. The significant boost in your credit score in such a short period can also help you qualify for better rates when refinancing loans.
- Late payments can harm your credit score, as well as result in interest charges.
- Existing debt might rule out credit-builder loans as an option for you. The same CFPB report indicates that individuals with debt experienced a three-point drop in their credit score after taking on a credit-builder loan.
Ultimately, credit-builder loans are perfect for practicing good money habits on a small scale while establishing a credit history. Nevertheless, you should only consider it if you don't have a credit history yet, you haven't got massive amounts of debt, you can afford the monthly installments, and you can commit to paying on time for the duration of the loan term.
2. Consolidate Your Debt With A Personal Loan
It's a well-known fact that acquiring a personal loan can negatively influence your credit score—most people see around a five-point drop on their credit report. Don't let that put you off, though. It's temporary.
The reality is that personal loans can affect your credit score in both good and bad ways.
Borrowing money and paying it back on time is always a good way to prove you're a low risk to lenders. Plus, the net impact is generally positive. However, with personal loans, you can essentially kill two birds with one stone: build your credit score and borrow money for a big purchase.
But what if you use the money to consolidate your debt instead?
Believe it or not, a study by TransUnion examining the impact of debt consolidation revealed some pleasantly surprising findings. Namely that debt consolidation often produces better credit performance and higher credit scores.
How much higher?
Credit boost: After consolidating their debt, 68% of consumers saw a 20-point increase in their credit score just three months later. An impressive 77% of near-prime consumers and 84% of subprime consumers saw the same result. A key factor contributing to this change was the decrease in credit utilization as borrowers paid down credit card debt with their personal loans.
Personal loan requirements: Generally, lenders will need proof of identity, as well as details of your net monthly income, employment, bank accounts, expenses, and assets such as property. If you don't get approval for an unsecured personal loan, you could possibly qualify for a secured one. In this case, you'll need to offer up collateral as a guarantee for the loan.
Where to apply: Most banks, credit unions, and online lenders offer personal loan products with varying loan amounts and terms.
Do you have an insufficient credit history or less than favorable rating? Here's a list of personal loan lenders you might want to evaluate:
|Lender||Loan Amount||APR||Loan Terms|
|LendingClub||$1,000–$40,000||7.04%–35.89%||36 or 60 months|
|OneMain Financial||$1,500–$20,000||18%–35.99%||24–60 months|
|Upstart||$1,000–$50,000||3.50%–35.99%||36 or 60 months|
You can also use tools like Experian's CreditMatch™ to find prospective lenders suited to your needs.
Now let's review personal loan pros and cons for the purposes of debt consolidation.
- Paying multiple lenders can be a drag, so simplifying your finances by directing those bills into one monthly payment is often a huge relief.
- Enjoy a fixed repayment schedule and know exactly how much is due every month.
- You could be eligible for a better interest rate than you were getting on your individual debts.
- A strong credit performance makes you more attractive to lenders, which can lead to more credit offers.
- Personal loans typically have higher APRs than other credit products like credit-builder loans, making them slightly more expensive.
- Missing a payment can seriously mess up your credit, so it's crucial to be disciplined if you want to succeed.
- If your loan is secured, you could put assets at risk.
- Depending on your lender, there might be additional fees, such as application fees, prepayment penalties, and origination fees.
While you're likely to see your credit score fluctuate throughout this process, the chances are that you'll end with a higher rating than when you started. Consider setting up an auto-pay to ensure you stay on track and don't miss any installments.
3. Report Rent and Utility Payments
Did you know that some of your largest monthly bills like rent and utilities don't count toward your credit history?
Since these are recurring monthly payments that demonstrate financial consistency in paying your accounts on time, why shouldn't you benefit from a credit score boost by self-reporting to major credit bureaus? After all, homeowners get credit for paying their mortgage each month.
Recognizing the need for such a reporting service, there are now several companies and online apps that enable you to report your rent, water, gas, electric, cable, and cellphone payments. Some, like ExperianBoost™, even let you get credit for popular streaming services, such as Netflix.
Credit boost: Although results differ for each individual, consumers report seeing anywhere between a 5 and 100 point jump in their credit score over time. Many notice an initial uptick in their rating within just a few weeks.
Rent and utility reporting requirements: Depending on the service you use, you'll likely need landlord verification, proof of identity, and access to your utility accounts. In some cases, you can link directly to your bank account so that all rent and utility payments are automatically tracked and reported.
Where to apply: You can find plenty of third-party rental and utility reporting services online. Each differs in what they'll report and the credit bureaus they'll report to, so you'll need to evaluate your options. Before you sign up, check with your landlord and utility providers to see if they already report your payments to credit bureaus. If not, here's a list of reporting services to kick-start your search:
Rent Payment Reporting
|Service||One-Time Setup||Recurring Fee||Credit Bureaus||Avg. Credit Boost|
|Rental Kharma||$50||$8.95/month||TransUnion, Equifax||40 points|
|Rent Reporters||$94.95||$9.99/month or
|TransUnion, Equifax||35 to 50 points|
|LevelCredit||$0 or $49.95 historical reporting fee (optional)||$6.95/month||TransUnion, Equifax||50 points in 2 years|
|Rock the Score||$48 + $65 historical reporting fee (optional)||$6.95/month||TransUnion, Equifax||30 to 50 points|
|Boompay||$10 + $25 historical reporting fee (optional)||$2/month||TransUnion, Equifax, Experian||5 to 100 points|
|Credit Rent Boost||N/A||$2.50–$3.75/month depending on package||TransUnion, Equifax||30 to 100 points|
Utility Payment Reporting
|Service||One-Time Setup||Recurring Fee||Credit Bureaus||Avg. Credit Boost|
|eCredable Lift||$0||$9.95/month or $24.95/year||TransUnion||88 points|
|LevelCredit||$0 or $49.95 to add 2 yrs of past payments||$6.95/month||TransUnion, Equifax||50 points in 2 years|
- Unlike many other credit-building options, you don't have to qualify.
- Some consumers see improvements to their credit score in just a few weeks.
- Most services allow you to report past payments, which can greatly aid in establishing a payment history quickly.
- Reporting rent and utility payments can beef up your file if you have a thin credit history.
- It's cheaper than many other methods of building credit without a credit card.
- This type of reporting adds to the diversity of your credit profile.
- Results aren't guaranteed. While some services will refund your money if you're not 100% satisfied, they can't promise specific outcomes.
- Missed or late payments will reflect negatively.
- You might need to convince your landlord to opt into a third-party rental reporting service if they're not using one already.
Overall, self-reporting your rent and utility payments is low risk as far as credit-building strategies go. Perhaps the biggest advantage is that there are no stringent qualifying criteria, so you can leverage this method no matter what your current credit situation looks like.
4. Open Store Accounts
Usually reported as revolving credit, store cards are perfect for people without an established credit history, as well as those who have a bad to fair credit rating. Approval is relatively easy, and each on-time payment contributes toward building a solid credit report.
Another appealing aspect is that you can purchase from your favorite stores while showing lenders you're a responsible borrower. If you're just thinking clothing and department stores, think again. Home Depot, Staples, Best Buy, Costco, Target, Sam's Club, Walmart, and even gas stations offer consumers the option of opening a credit account these days.
Credit boost: Reports vary when it comes to how many points a store card can add to your overall credit rating, but it's important to keep credit utilization in mind. Credit experts recommend staying under 30% of the limit on any card, but consumers who tend to use less than 10% have better scores.
Store account requirements: While requirements will differ from store to store, you'll typically need proof of income and employment, identification, address verification, a social security number, and other supporting documents.
Where to apply: You can apply at any retailer or supply store offering credit account products.
- You can potentially earn a nice chunk of change in the form of a signup bonus. Yes, some stores reward you simply for opening an account.
- Many stores offer exclusive freebies, discounts, rewards, which can have a great payoff if you use them correctly.
- Some retailers will offer interest-free financing to brand new account holders, making bigger purchases a little more budget-friendly.
- Store cards have notoriously high interest rates. As a result, you'll want to avoid carrying a large balance—if you have to carry one at all.
- As with any credit application, you'll receive an initial ding on your FICO score thanks to a hard inquiry. However, this minor drop is temporary as long as you manage your store accounts well.
- Late payments may incur a fee, so you'll need to check T&Cs before applying.
The trick to managing a store card successfully is to not spend more than you would in cash. It can be tempting to buy whatever your heart desires, but this can quickly get out of hand and sink you into a black hole of debt. Make sure you pay off your account every month with the cash you would have spent.
Now that you're slightly more informed about how to build credit without a credit card, do you know why you should be doing it?
Why Building Credit is Important
Your credit score is a fundamental indicator of your financial health. It lets lenders measure your trustworthiness so that they can determine whether you're a good prospect. Although there's risk in any type of debt for you, there's also a high risk for credit providers.
However, your credit score doesn't only play an important role in how likely a lender is to approve you. It also serves as a variable for calculating the amount of interest you'll pay on a particular line of credit. Frankly, having no credit score is just as bad as having a bad one.
Don't ignore your credit score because you never know when you're going to need a great rating to get approval for something you want. Monitor your report regularly so that you can take action when necessary. This will ensure you're in the best position possible to navigate any future financial hardships.
Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on Forbes, The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.