How to build credit without a credit card

A credit report that shows responsible use of credit can make borrowing money to buy a house or car more affordable through lower interest rates. It can also be assessed by employers when you apply for a job, landlords when you want to rent an apartment and car insurers when they set your rates.

“We use credit every day,” says Jeanne Kelly, New York-based credit coach and founder of The Kelly Group. But everyone starts with a clean slate, and building credit can take time.

What credit score do you start with?

Credit scores are three-digit numbers created from information in your credit report, including payment history and the amount of debt you have. The score tells lenders how likely you are to repay what you borrow.

To have a score, your credit report must show one or more accounts that are at least six months old and at least one account that has been reported to one of the three credit bureaus (Equifax, Experian, or TransUnion) in the past last six months. .

Credit scores range from 300 to 850. A lower score indicates that there is a greater risk of not paying your bills, based on your history. “Without good credit, you can get a high interest rate, or worse, you may not even qualify for the loan,” says Lyle Solomon, senior attorney at Oak View Law Group, a California-based firm specializing in consumer credit. the consumption.

A good credit score, according to the Fair Isaac Corporation (FICO) scoring model, is 670 or higher. Another scoring model used by financial institutions is VantageScore, which considers 661 or more to be a good score.

6 Ways to Build Your Credit Without a Credit Card

Opening a credit card, making purchases, and paying off your balance each month is a common way to build up credit from scratch. But this is not the only way.

In fact, 10% of your FICO score is based on your “credit mix,” or the types of loans or lines of credit you have. When you’re just starting out and have little or no payment history, your credit mix is ​​even more important, according to MyFICO.com.

Here are six alternatives to opening a credit card to build credit.

1. Credit-generating loan

A credit loan essentially lets you lend money to yourself, Kelly explains. This is an installment loan with fixed monthly payments, but instead of giving you the money up front, the lender deposits it in a savings account or certificate of deposit (CD).

Some banks withhold access to the account until you repay the loan in full, while others will release funds monthly if you make payments on time. “The good thing about it is you show a payment history, and the money will come back to you, and that’s why it’s a loan for yourself,” Kelly explains.

However, these loans often charge interest and origination fees, so make sure you understand the total costs before getting one.

2. Personal loans

Personal loans, which can be secured or unsecured, allow you to borrow a large or small amount of money to use for anything. You repay the loan in fixed installments over several years. The lender reports the balance and your current payment activity to the credit bureaus.

With a low or no credit score, it can be difficult to qualify for a personal loan at a competitive interest rate. Asking a trusted friend or relative with good credit to co-sign the loan could help you get approved and may lead to a better interest rate.

However, warns Kelly, the co-signer should be prepared to step in if you can’t make a payment on time, because a late or missing payment also affects their credit.

3. Car loan

A car loan is money you borrow from a car dealership or third-party lender to buy a car. Usually this requires a cash deposit, although this is not always the case. And without a credit history, you might want to add a co-signer to qualify for a better interest rate.

Payments are part interest and part principal, and due on the same day each month until the balance is paid off. If you miss a payment, the lender may be able to repossess your car. It is similar to a mortgage in this way, since the loan is secured by a physical asset. As with other loans, the lender is responsible for reporting your car loan payments to the credit bureaus. An on-time payment history will boost your credit score.

4. CD loan

A CD is like a savings account, except your money is locked in for one to five years. The trade-off is that you can earn more interest than you would by keeping your money in a traditional savings account. You can always withdraw your money earlier, but you will have to pay a penalty.

A CD loan involves taking out a loan and using the CD as collateral. This means that you receive a lump sum of cash and then pay back what you borrowed, plus interest, to the bank each month. If you miss payments, the bank may take your CD and may even charge a penalty, Solomon says. “Using a CD-secured personal loan to improve your credit score will only work if you make payments in full and on time,” he adds.

5. Federal Student Loan

The U.S. government lends students money to pay for undergraduate and graduate degrees and professional certification programs — and you don’t need a credit history to qualify.

Unlike private student loans, there is no credit check to obtain most federal student loans. Instead, eligibility is based on citizenship, registration, and in some cases financial need, so it can be a good way to start building credit early.

On-time payments will increase your credit score, while late or missed payments will have a negative impact. “Student loans can also help improve your credit score by increasing your average account age and diversifying your credit mix,” Solomon says.

Some student loans only go into repayment after the borrower has left school, which is called forbearance. Even if you are not actively making payments while forbearing, the loan will still appear on your credit report as being in good standing.

6. Peer-to-peer lending

Peer-to-peer (P2P) lending platforms help you borrow money from individuals rather than a bank or credit union. Investors lend money and profit from the interest you pay on the loan.

“Generally, P2P lenders look for scores ranging from fair to excellent, i.e. 580 or higher,” Solomon says, so you’ll need a credit history to qualify. “Because the whole process is online and streamlined, you can get a loan in just days if you qualify,” he adds.

Another benefit is that P2P lenders only do a soft inquiry to check your credit report, Solomon says. Traditional lenders usually do a thorough investigation that could affect your credit score.

A disadvantage of using P2P platforms is that they can send your account to collections faster than a traditional lender if you miss a payment.

Other options

If you’re looking to potentially speed up the process of building credit or are worried about borrowing money just yet, here are some additional strategies to increase your score.

• Piggybacking on someone else’s good credit: Many credit card companies allow cardholders to add authorized users to their accounts. As an authorized user, you may obtain a card to use for purchases, but the primary account holder is ultimately responsible for payments. The potential benefit to you, assuming the primary account holder is a responsible borrower, is that their credit account will show up on your credit report, along with payment activity. But not all lenders report authorized users to the credit bureaus, Kelly says, so make sure that’s an option before you tangle with another borrower.
• Report rent and utility payments to offices: The three major credit bureaus do not require landlords and property managers to report rental or utility payment activity, but they will welcome information when submitted. If you pay your rent and utility bills on time, consider asking your landlord if they can report your payments to the credit bureaus or do it yourself. There are several online services (many are free, but some charge a one-time or monthly fee) that you can sign up for. Some of them will even report the last two years of positive payment history.
• Report recurring bills to offices: Reporting recurring payments, such as streaming subscriptions and mobile phone plans, is another way to prove your reliability. bill payment. Various online services, including one offered directly by the Experian credit bureau, allow you to connect the bank accounts you use to pay your recurring bills, then report those with a positive payment history to some or all three credit bureaus .
• Pay your bills on time: The most important factor when it comes to establishing good credit is debt payment history, which makes up 35% of your FICO score. Making full and timely payments on every loan or line of credit is imperative to maintaining strong credit.

The take-out sale

The best way to build credit is to borrow money and pay it back on time. You can do this through credit cards or installment loans, although it can be difficult to qualify for either if you don’t have a credit history to back it up. . The solution can start with options that don’t require a credit check, like federal student loans or credit loans, or options that ask for collateral in exchange for a lower interest rate, like CD loans. .

You can also sign up for a service that reports non-debt bills that you regularly pay on time, such as monthly fees or rent, to the credit bureaus. “These are things that can work so quickly [as loans] and they’re inexpensive,” Kelly says. “These are building blocks.”