How to Build Credit Without a Traditional Credit Card
Plenty of exasperated consumers are familiar with this common credit-building conundrum: You need a credit card to build credit, but you need a good credit score to get approved for a credit card. Luckily, there are alternative ways to improve your credit that don’t require hard-to-get credit cards. In some cases, you might not need a credit card at all.
Checking and monitoring your credit
Before you jump into credit building, the first step is always to pull your credit report and take a look at what you’re working with. You’re entitled to one free credit report every 12 months from each of the three major credit bureaus, which you can get at AnnualCreditReport.com.
There are also a number of services that let you check your actual credit score, though not all of them are free. The three major credit bureaus all offer credit monitoring services for a monthly fee. This is one way to track your progress and gain an understanding of how your actions are influencing your credit score.
How to build credit without a credit card
Fortunately, you do have a number of options for building credit if you’re unable to get approved for a standard credit card. Here are some of the best tricks for building credit without one.
Get a secured credit card
Secured credit cards are an excellent way to build credit, and they can be easy to qualify for. Unlike traditional credit cards, secured cards require an upfront deposit. That deposit becomes your credit limit, so you can never charge more than you’ve already paid. McKenzie Walsh, a certified financial counselor at the nonprofit AAA Fair Credit Foundation, describes a secured credit card as a “credit card with training wheels.” She said they can be very helpful in building credit when you can’t get approved for a credit card, and after a while, your issuer will usually “take the training wheels off” and upgrade you to a regular, unsecured credit card. As a bonus, many secured credit cards now offer some type of credit monitoring or credit score free of charge.
Apply for a credit builder loan
Some credit unions and online banks offer credit builder loans for folks who want to avoid credit cards altogether. You don’t need great credit to qualify for these, but you may need to show steady employment and residential history. With credit builder loans, you won’t get your funds right away. Instead, they’re placed in a savings account and held there until the loan is paid in full. These credit builder loans can boost your score if they’re paid off on time, but make sure you pay attention to interest rates while shopping around.
Become an authorized user
You can ask someone to add you as an authorized user on their credit card. Doing this means that the activity on that account — whether from you or the primary cardholder — will show up on your credit history and influence your score (be sure to check that your issuer reports authorized users to the credit bureaus). Keep in mind that if the primary cardholder misses a payment or runs up a high balance, it could hurt your score rather than help it, so choose someone you know to be financially responsible. You can also try adding a cosigner with excellent credit to your credit card application. This will make them responsible for your debt if you fail to pay, so make sure you use the card responsibly.
Have your rent or utility payments reported to the credit bureaus
Most landlords don’t report rent payments to the credit bureaus. But the bureaus will include them in your credit history if they receive them. If you have a history of paying on time, ask your landlord to start sharing that information with the credit bureaus. Keep in mind that this could cost you money, and you should check your credit report after a few months to make sure your rent payments are there. A new service offered by Experian called Experian Boost will incorporate your utility bill payments into your credit score, too.
Use your checking and savings accounts responsibly
While using your debit card doesn’t typically help you build credit, handling your bank accounts responsibly could, thanks to a new credit scoring model. The UltraFICO™ Score, which is currently being launched as a pilot program, will include banking data such as checking and savings account activity.
Common questions about building credit
Even with all the methods for building credit mentioned above, you might still feel confused. Here are some answers to common questions about building credit.
Can you build credit with a debit card?
Generally speaking, your debit card transactions will not help you build credit. Your credit score is meant to indicate whether you’re able to pay back money that you borrow, and debit cards deal with money you already have, not money you’ve been lent. As mentioned above, the new UltraFICO™ scoring model does incorporate checking account activity. However, most lenders aren’t yet using this scoring model, and there’s no telling how widely it will eventually be adopted.
How do student loans affect my credit score?
The impact of student loans on your credit all depends on how you manage them. If you repay them on time and never miss a payment, they can be a great tool for building credit. Pay late, and your credit score will take a hit. (Miss too many payments, and the loan may go to collections, a black mark that can stay on your credit report for seven years.)
Does checking my credit score hurt my credit?
Checking your own credit score won’t hurt your credit. Credit checks only affect your score when they’re considered “hard inquiries,” which occur when a lender pulls your credit report because you’ve applied for an account. Checking your own credit is considered a “soft inquiry,” which isn’t visible to lenders as part of your report.
If you need to build or repair your credit, know that traditional credit cards aren’t the only option. Whichever method you choose, make sure to always pay off your balances in full. Otherwise, you could end up hurting your credit and racking up debt at the same time.