There’s no question that opening a credit card and managing it in a responsible way can be an effective credit-building strategy. Yet the reality is that not everyone is a fan of credit cards. If you do prefer to build your credit score without a credit card it is possible.
Here’s what you need to know about how to build credit without a credit card. You’ll also discover the benefits and drawbacks of avoiding credit cards during your credit-building journey along with expert tips to help you along the way.
How to build credit without a credit card
When you begin the process of building credit from scratch, you most likely won’t have a credit score. To become eligible for a FICO® Score, your credit report needs to have the following:
- At least one account that’s at least six months old.
- At least one account that’s been reported to the credit bureaus in the last six months.
A single account or multiple accounts can satisfy the minimum requirements above. But once you meet these requirements, you’ll be eligible for a FICO Score.
The rules to qualify for a VantageScore® credit score are a bit different. Your credit report may be eligible for a VantageScore credit score once it has just one credit account, even if that account has been opened for less than six months.
As you’ll notice above, neither FICO or VantageScore require you to open a credit card to qualify for a credit score. A credit card certainly could help you establish either type of credit score. But so could a personal loan, a student loan and many other types of credit obligations as long as the creditor reported and updated the accounts with one or more of the three major credit bureaus.
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7 Strategies for building credit without a credit card
Below are seven ways you can establish credit without using a credit card.
1. Apply for a credit builder loan
A credit builder loan could be a great way to build credit from scratch, or even to help fix bad credit. When you open this type of installment loan, the lender doesn’t give you the loan proceeds right away. Instead, the cash you borrow goes into a savings account or certificate of deposit (CD) where it remains while you make your monthly loan payments.
When you’ve paid off the loan, the funds will be released from the savings account to you. This may happen in one lump sum at the end, or monthly as you make payments.
If you’re considering this type of loan, make sure the credit union or lender will report the account to all three credit bureaus.
2. Take out other loans as needed
You don’t want to take on debt for the sole purpose of building credit. However, if you need to secure financing to pay for your education or to purchase a reliable vehicle, a student loan or a car loan could also help you build credit.
3. Get credit for bills you already pay
If you’re like most people, there are probably bills you pay each month that don’t appear on your credit reports. For example, most landlords, cellphone companies and subscription service providers don’t report account information to the credit bureaus. Yet there are third-party services you can use to share your payment history on these types of accounts with the credit bureaus.
Experian Boost is an example of a free service you can use to share data with one credit bureau, Experian. They will report the monthly bills you’re paying with your credit cards and bank account. If you’re paying eligible cellphone bills, cable, online streaming services or rent, you can use the service to add these accounts to your Experian credit report. You could also pay those bills with Experian’s Smart Money™ Debit Card, which is linked to a digital checking account and will automatically let you know which accounts are eligible for Experian Boost. According to the credit bureau, the average Experian Boost user saw their FICO® Score 8 increase by 13 points.
4. Become an authorized user
Another possible way to build credit without opening a credit card on your own is to piggyback on someone else’s credit card account. If you have a family member or friend who’s willing to add you as an authorized user on their existing credit card, you might benefit from their good credit management history.
Before you try out this credit-building strategy, it’s important to note a few details. First, you should only become an authorized user on the credit card of someone you know. Never pay to be an authorized user on a stranger’s credit card account as this practice could be considered fraud.
You also only want to ask a friend or family member to add you on to well-managed credit cards. If you become an authorized user on an account that has a late payment history or a high credit utilization ratio (aka a credit card with a high balance to credit limit relationship), the account might hurt your credit score.
If you are an authorized user on a card that is hurting your score you can request that account be removed from your credit report. Be sure to also get your name removed from the credit card.
5. Pay your credit obligations on time
Having tradelines (aka credit accounts) show up on your credit report is important when you’re trying to establish a credit score. But if you want to earn a good credit score and enjoy the benefits that a good credit score offers, it’s how you manage those credit obligations that really matters.
Paying your bills on time is essential when it comes to establishing a good credit score. In fact, 35% of your FICO Score is based on your payment history, and payment history is moderately influential over VantageScore credit scores as well.
6. Monitor your credit reports
When you’re trying to build credit, with or without a credit card, it’s important to keep an eye on your progress. So, you’ll want to make a habit of checking your credit reports from all three credit bureaus on a frequent basis.
Credit monitoring services can make this task simple, both during the credit-building phase and afterward. Equifax, TransUnion and Experian also recently announced that they will permanently offer free credit reports to consumers once a week on a permanent basis.
7. Avoid excessive applications for new credit
To establish credit, you have to apply for and open new accounts. But if you make a habit of applying for credit too often, your credit score might suffer in the process.
When a lender accesses your credit report from a credit bureau, a record of that access, called a credit inquiry, goes on your credit report. Hard credit inquiries, like those that occur when you apply for a loan or credit card, could damage your credit score for up to 12 months. And the more hard inquiries that appear on your credit report, the greater the credit score damage could be.
Hard inquiries only have a minor impact on your credit score. So, you don’t need to avoid applying for credit when you need or want financing. But it’s still smart to avoid applying for accounts in excess to protect your credit score.
Pros and cons of building credit without a credit card
Pros
- Peace of mind: If you feel nervous about using credit cards, building credit without opening this type of account could give you peace of mind until you feel ready.
- Lack of temptation: Credit cards do not cause debt, but they are a temptation for some people. If you’re worried you won’t be able to avoid overspending on a credit card account, waiting until the future to open this type of account might be advisable.
Cons
- Poor credit mix: Without a credit card, it’s difficult to have a good credit mix. Credit mix — the variety of account types on your credit report — plays a role in how your FICO Score is calculated and makes up 10% of your FICO Score.
- Limited rewards: When you attempt to build credit without credit cards, you’re forced to use debit cards and cash for your purchases. These payment methods limit your rewards potential compared to rewards credit cards which can feature generous points, miles and cash back on your everyday purchases.
- Less fraud protection: When comparing debit cards vs. credit cards, credit cards offer greater fraud protection if someone steals your account information or makes unauthorized purchases on your account. If you never open credit cards, however, your personal finances could be at risk.
Should you open a credit card?
Credit cards offer many benefits, including the possibility of building your credit score when you manage the account in a responsible manner. Going without a credit card has many drawbacks. So, it’s important to research the conveniences you’ll be forgoing if you decide to avoid credit cards before you decide which choice is right for you.
If you decide to apply for a credit card and you’re worried about the possibility of overspending, consider starting with a low-limit account. An account with a lower credit limit could help you get into the habit of using and paying off a credit card every month while avoiding debt and interest charges.
Tips for building credit
Below are four simple tips to help you as you work to build your credit score.
- Schedule payment reminders. Many loan companies and credit card issuers will allow you to set up email or text alerts to remind you when your payment is due. And if your creditor doesn’t offer this feature, you can always schedule recurring reminders on your smartphone.
- Set up autopay. Forgetting the due date on a credit obligation could have serious consequences. Late payments can be expensive, and late payment notations on your credit report might take a major toll on your credit scores. If you’re comfortable setting up automatic payments with your lenders and credit card companies, however, it’s easier to avoid accidentally forgetting your due date.
- Make multiple payments per month on credit cards. If you do decide to open credit cards, making several payments a month to your credit card issuer could be helpful. This good habit can help you maintain a lower credit card balance. Remember, your credit utilization ratio is a snapshot of the relationship between your credit card balance and your credit card limit at the time of your statement closing date (just once a month). So, keeping a low credit card balance throughout the month may be helpful.
- Pay off your full credit card balance every month. It’s important to pay your full statement balance on all of your credit cards each month. This good habit helps you avoid paying costly interest charges on your credit card accounts.
Frequently asked questions (FAQs)
Everyone’s situation is different. But building credit with or without a credit card can be easy if you manage the process in a responsible way.
To establish credit you need to open accounts with creditors that report to the three major credit bureaus. From there, it’s important to pay those bills on time every month. Finally, you need to allow enough time for those credit tradelines to update on your credit report for at least six months to establish both FICO and VantageScore credit scores.
Whether you have no credit or bad credit, you could have trouble qualifying for certain types of financing. In either of these situations, lenders may consider you a higher credit risk and may be hesitant to approve you for certain types of loans, credit cards or other forms of financing.
In general, bad credit may signal to lenders that you can’t handle credit responsibly, where no credit may indicate that you just haven’t had a chance to establish credit yet. Think of no credit as a clean slate and bad credit as a blemished past.
However, even when you have no credit or bad credit, there are credit card issuers and lenders that may be willing to work with you. From there, you can try to establish good credit and improve your borrowing prospects for the future.
There are a few ways to build credit without buying anything or going into debt. Credit builder loans are one example of a credit-building tool that allows you to establish credit without buying anything. Becoming an authorized user on another person’s credit card is another way to build credit without buying anything or going into debt.
It’s also worth noting that even if you open a credit card, you can build credit without unnecessary spending. You could strictly use your credit card for small, essential purchases (think gas or groceries) and then pay off those amounts right away. This approach would allow you to build credit without debt as well.
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