How To Build Credit Without A Credit Card

You are likely aware of how important it is to have good credit. A solid credit history and score is the key to unlock many doors and opportunities – the higher your credit score, the more attractive the terms you may be offered on a car loan, mortgage or credit card.

If you're wary about opening a credit card to build credit, the good news is that there are other ways you can build credit. That way, you can avoid racking up a balance on your credit cards and paying a significant chunk in interest.

How To Start Building Credit Without A Credit Card

As mentioned, it's entirely possible to build credit without a credit card. Let's look at a few ways you can establish credit:

1. Pay Your Bills On Time

Your payment history makes up the largest part of your credit score – 35% to be exact. In turn, paying bills on time is critical to maintaining a good credit score.

The most common types of accounts that show up on your credit report include personal loans, student loans, car loans and mortgages. Generally, your utility bills and rent payments don't show up on your credit history.

If you're running into trouble being on time with your bill payments, reach out to your lender. See if they're willing to move your payment date or potentially lower your minimum payments. If you're an account holder in good standing, your lenders may be more open to working with you.

2. Keep Your Credit Utilization Low

Credit utilization, which is the percentage of your overall credit limit you are using across all your revolving lines of credit, makes up 30% of your credit score.

The general rule of thumb is to keep your credit usage around or under 30%, but the lower the better. Anything higher than 30% sends a smoke signal to lenders and creditors that you might be financially strained – and more likely to fall behind on your payments.

Know how much of a balance you're keeping on all revolving lines of credit, such as your home equity line of credit (HELOC) or business line of credit.

3. Monitor Your Credit Report Regularly

Your credit report is a statement that includes details about your current credit situation as well as your credit activity. Information on a credit report may include:

• Credit accounts (credit cards, mortgages, auto loans, student loans, HELOCS).
• Terms of your credit accounts.
• How much is owed to your creditors and lenders.
• Payment history.
• Tax liens, court judgments, bankruptcies.
• Personal information (name, address, Social Security number, birth date).
• Companies or individuals who have made an inquiry about you.

Your credit report contains a lot of key personal and financial information. Unfortunately, it may contain errors that could lower your credit score – for example, reports of late payments, when you indeed weren't late. In 2023, the Consumer Financial Protection Bureau (CFPB) received over 443,000 complaints of incorrect information on credit reports.

Because there's a chance there might be errors, inaccuracies or missing information on your credit report, it's important to review your credit report every so often. You can order a report for free from each of the three bureaus to look at your credit history at AnnualCreditReport.com.

Here are the general types of errors you can keep an eye out for on your credit report:

• Accounts reported as open when they are now closed.
• Accounts incorrectly reported as late or delinquent. Also look for accounts with incorrect current balance.
• Incorrect date you made on a payment.
• Wrong personal information: For example, the misspelling of your name, an incorrect address or an address of a place you never lived in.
• Hard inquiries: Hard credit inquiries are generally made by lenders and creditors before they decide to extend your financing or a line of credit. They tend to result in a slight, temporary dip in your credit score. If a hard inquiry is incorrectly reported on your credit report, it could lead to a decrease in your score.
• Soft inquiries: Soft inquiries don't result in any negative impact on your score. However, it's a good idea to check to see that any soft inquiries aren't accidentally reported as hard inquiries.
• Inaccurate credit limits: This could mean your credit usage looks higher than it actually is.
• Accounts belonging to a different person with the same name. See if any accounts are incorrectly listed under your report.
• Being listed as the owner of the account when you are actually just an authorized user.

4. Avoid Unnecessary Credit Inquiries

Hard credit inquiries can bump down your score. Further, too many credit inquiries within a short time frame signals to lenders that you might be short on funds and desperately seeking a financial lifeline.

You'll want to avoid unnecessary credit inquiries if possible. If you are shopping around for a car loan or personal loan, try to apply within a certain time frame. For instance, if you're on the hunt for auto financing, oftentimes any credit inquiries from lenders within a 15- to 45-day window count as a single inquiry. That's because the credit bureaus know you're shopping around for rates.

If possible, see if you can get prequalified for financing. Prequalification gives you an estimate on the loan amount, rates and terms you'd likely qualify for when you do officially apply. Lenders will typically pull a soft credit inquiry for prequalification, which won't impact your score.

5. Be Cautious About Being A Co-Signer

A major downside of being a co-signer is that if the primary borrower is late or missed any payments, it can negatively impact your credit score.

It's important to know that should a partner, friend or family member ask you to be a co-signer on a loan, you'll be on the hook financially. Should the primary borrower fail to hold up their end of the deal and keep up with payments, you'll be responsible for any remaining balance. Should their debt enter collections, debt collection agencies may reach out to you to recoup what's owed.

Alternative Ways To Build Credit Without A Credit Card

When it comes to building credit, there are a number of alternatives to credit cards. Let's look at some of the most common ways to go about it:

• Secured loans: A secured loan is backed by collateral, such as a car, home or other valuable asset. Being timely on your payments can help you build credit.
• Mortgage loans: A mortgage loan, or home loan, is a type of installment loan used to purchase a home. Making payments over the life of the loan can also help improve your credit.
• Home equity lines of credit: Similar to a credit card, a HELOC is a revolving line of credit where you borrow against your home's equity. You’ll have access to a line of credit that you can use for a number of different purposes, backed by your home equity.
• Auto loans: An auto loan is another type of installment loan where you take out a lump sum to buy a car and are responsible for monthly payments. The monthly payments are typically a fixed amount each month.
• Secured credit cards: Secured credit cards work just like a standard credit card, except that it requires you to put down a security deposit. Your line of credit usually matches your deposit. If you make consistent on-time payments over a set period of time, you might be eligible to "graduate" to an unsecured credit card.
• Lending circles: A lending circle can help you build credit by reporting your payment history. It helps folks who typically don't have access to financing have the opportunity to get a loan. Usually, everyone decides on the loan amount – say $1,000. If there are 10 people in the lending circle, each person contributes $100. And every month, a member gets their turn in borrowing that $1,000.

Credit Builder Loans

A credit builder loan is a type of loan that's designed to help the borrower build credit. Instead of receiving proceeds from the loan upfront, the funds are kept in an account that's controlled by the lender. Once you're done making payments, the money is released to you.

Reporting Your Rent Payments

If your landlord or property management company opts in, you might be able to report rent payments to improve credit. You'll need to sign up with a third-party platform that reports your on-time rent payments to the credit bureaus. Note your landlord usually needs to allow for this, and you may need to pay a subscription fee.

Becoming An Authorized User On A Credit Card

When you're an authorized user on a credit card, you can use the account holder's card for purchases, just as if it were your own credit card. The major advantage is that you benefit from the cardholder's credit history. Their credit history will appear on your credit history and can help you gradually build your score.

Peer-To-Peer (P2P) Lending Platforms

The Bottom Line: Credit Cards Aren’t The Only Way To Build Credit

There's no question that building credit is an important part of your life as a consumer. Having good credit can mean less expensive loans and more attractive terms. While using credit cards is one way to build credit, it isn't the only route.

To help you monitor your credit and more easily keep tabs on your spending and budget, sign up for the Rocket Money℠ app.