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Many people mistakenly believe that a credit card is the only way to build their credit. But this is not true. So if you are wondering how to build credit without a credit card, we have some recommendations you can follow. In fact, various installment loans can help you build your credit. You can even make your utility bills work for you, and we’ll show you how.
Highlights & Key Takeaways
- You can obtain a credit score without having a credit card.
- Getting a credit builder loan, student loan, P2P loan, or a secured credit card can help you establish a credit history in just six months.
- Paying your bill on time every month is still the most critical factor in developing a good credit score.
- Some installment loans are available for consumers with bad or fair credit.
10 Ways to Build Credit Without a Credit Card
Building your credit without a credit card is possible. Two of the best ways to do this is through installment loans and utility bills. But we have a few other tips, too, that can help you build your credit in multiple ways, all at the same time.
1. Take out an installment loan
If you don’t want to get a credit card, an installment loan is your next best strategy to help you build your credit. Installment loans are typically personal loans or auto loans that you pay back in even monthly amounts to pay down your principal balance and interest. A great example is a personal loan for poor credit. Some lenders will offer loans for people just starting out or who haven’t quite built up their credit scores. Paying your loan on time each month can help you improve your score.
- Ideal for: Those who want to build their credit but do not want a credit card.
- Ease of Implementation: Medium. Apply for the loan, sign your loan agreement, and fulfill your monthly loan obligations throughout the loan.
- Timeframe for results: With good payment history, you may see your credit score start to improve within two or three months. If you got a loan to help you build credit from scratch, allow at least six months to see your first credit score.
- Cost: Be on the lookout for late payment fees, origination fees, and early payoff penalties. Also, ensure you understand the interest rate on your loan and how that will impact the amount you pay back over time.
- Risk: Medium. Installment loans require a responsible lender. Do not take out an installment loan if you are unable to meet the minimum monthly obligations.
- Effectiveness: High. Installment loans are a great way to build or improve your credit, provided you are able to pay your bill on time each month.
- Sustainability: Most installment loans are two to seven years.
- Finimpact score: 4
2. Piggy-back on someone else’s good credit by becoming an authorized user on their account
If you are unable to get a credit card of your own because you don’t have established credit yet, or you are not ready to manage the responsibility on your own, you may be able to piggy-back on a family member or friend. Capitalizing on their responsible behavior is a great way to build your credit. If you have someone you trust, ask them to add you as an authorized user on their credit card account.
- Ideal for: Those not ready to apply for a credit card on your own or are unable to provide proof of income
- Ease of Implementation: Easy. Have your friend or family member call their credit card bank to discuss options.
- Timeframe for results: Six to 12 months for these activities to start driving your credit score upwards.
- Cost: You will be responsible for paying for your share of purchases made on the card and for fulfilling your portion of the minimum monthly payment.
- Risk: Low, provided you work with a trusted and financially-responsible family member or friend.
- Sustainability: High, especially if you can trust them to pay their bill on time and keep their utilization under 30%.
- FinImpact Score: 4
3. Make your utility payments count
Many people don’t realize that some of those monthly expenses can help you build your credit. For example, you may pay for your mobile device, various streaming services, water or electricity bills, etc. Programs like Experian Boost and UltraFico let you get credit for paying monthly utility, cell phone, and streaming service bills on time. You can even get credit for streaming payments on Disney+, HBO, Hulu, Netflix, and Starz.
- Ideal for: Those making on-time cell phone, utility, and/or service payments for several months to several years.
- Ease of Implementation: Easy. It only takes about five minus to sign up for Experian Boost or UltraFico.
- Timeframe for results: You may see an instant increase in your FICO score from Experian.
- Cost: Signing up for Experian Boost and UltraFico is free.
- Risk: Low.
- Sustainability: Easy - once you’re signed up, you can set it and forget it unless you sign on with a new provider or carrier
- FinImpact Score: 3
4. Apply for an auto loan to finance a used car
An auto loan is a type of installment loan used specifically for the purchase or refinance of an automobile. When applying for an auto loan, pay attention to the loan costs, such as the interest rate, late fees, early payoff penalties, and other unique loan terms. Also, find out if you will be required to pay a downpayment. A downpayment can help lower the amount you pay each month and can save you interest over time.
- Ideal for: Those who want to buy a new or used card
- Ease of Implementation: Medium. You will need money for a potential downpayment, and it takes time to shop for the right car.
- Timeframe for results: You may see an increase in your credit score in as little as two or three months.
- Cost: Be on the lookout for downpayment requirements, the amount of interest you will pay over time, early payoff penalties, etc.
- Risk: Medium.
- Sustainability: Car loans typically range from 24 to 60 months, but 72- and 84-month terms are becoming more common.
- FinImpact Score: 4
5. Take out a student loan to pay for your continuing education costs
If you are taking college courses, a student loan can help ease the financial burden while your income is hindered due to your course load. And a student loan is a great way to build credit, especially if you don’t have a credit card or have never taken out an account that can help make you eligible for a credit score.
- Ideal for: Those who want to pursue a college education.
- Ease of Implementation: Medium. To qualify for a student or government loan, you or your parents must complete a FAFSA each year.
- Timeframe for results: You will see an initial score in about six months.
- Cost: You do not need to repay your student loans while you are in school.
- Risk: Medium. Suppose you don't make student loan payments or develop a habit of late payments. In that case, your student loan may eventually go into default
- Sustainability: Paying off student loans can take anywhere from 10 to 30 years.
- FinImpact Score: 2
6. Try a peer-to-peer loan
Peer-to-peer (P2P) loans are not what you might think. While the name implies you are borrowing from someone you know, an actual P2P loan is made available through online platforms that pair you, the potential borrower, with an investor willing to issue you a loan. One of the biggest benefits of a P2P loan is that you can often get a lower interest rate than you could with a credit union or bank.
- Ideal for: Those who are not qualified for traditional forms of financing or who need funds quickly.
- Ease of Implementation: Medium. To get a peer-to-peer loan, borrowers follow a nearly identical process as an online loan. However, you may need to wait a while for funding as the process can take a few days to a few weeks
- Timeframe for results: You will see an initial score in about six months.
- Cost: Although you may receive a low-interest rate from a peer-to-peer lender, most P2P loans charge origination fees and early payback penalties.
- Risk: Medium. peer-to-peer lenders are less likely to tolerate late payments and may send your defaulted loan to a collection agency even if you miss only one payment. If your payments are late, a P2P lender may raise interest rates or add fees
- Sustainability: Loans are typically three-year or five-year terms.
- FinImpact Score: 2
7. Apply for a credit builder loan
If you can’t get approved for a traditional loan, a credit builder loan might be a more effective way for you to build your credit from scratch. These loans are for a small amount, usually under $5,000, with a short repayment period of six to 24 months. Essentially, with this type of loan, you borrow money from yourself. The money you borrow is deposited in an account while you make payments. You get your money back after you have successfully fulfilled your loan obligations.
Paying off a credit builder loan can positively impact your credit score by about 35%, provided you make your payments on time.
- Ideal for: Those with no credit, poor credit, or those trying to build or improve their credit history.
- Ease of Implementation: Easy. It doesn’t take all that long to apply for a credit-builder loan. Once you have your loan, ensure you pay on time every month.
- Timeframe for results: You can see your score start to improve, even if just a little bit, as soon as 30 to 45 days after the credit bureau reports on your payment activity.
- Cost: You will be responsible for paying the upfront deposit to secure your credit builder loan.
- Risk: Low since you borrow approximately $300 to $1,000 from yourself through a creditor.
- Sustainability: High. Paying your bills on time is necessary to help your score.
- FinImpact Score: 3
8. Build a healthy savings account
A savings account won’t help you build your credit score. However, building a savings account in conjunction with one of the other recommendations here can help you build your score and establish good financial behaviors. Consider the 50/20/30 rule for your finances; Divide your income into three categories, spending 50% on needs, 30% on wants, and 20% on savings. Now, set a monthly goal to contribute 20% of your net income to your savings account.
- Ideal for: People who need to save money for the short or long term and aren't as concerned about getting the best interest rate.
- Ease of Implementation: Easy. Be prepared with your driver's license, Social Security number, date of birth, and contact information.
- Timeframe for results: Immediate. Your savings account will start to grow as soon as you deposit funds.
- Cost: Many savings accounts have a fee to open the account. This fee is usually around $25.
- Risk: Low since you are saving your own money.
- Sustainability: High, especially if you can live by the 50/20/30 rule.
- FinImpact Score: 1
9. Learn how your credit score is calculated
Part of building your credit is understanding how your credit score is calculated in the first place. FICO credit scores are calculated using the following criteria:
- Payment history: 35%
- Amounts owed: 30%
- Length of credit history: 15%
- Credit mix: 10%
- New credit: 10%
And your VantageScore utilizes a very similar approach.
- Payment history: 40%
- Depth of credit: 21%
- Credit utilization: 20%
- Balances: 11%
- Recent credit: 5%
- Available credit: 3%
Credit bureaus need to see activity to generate a credit score, which is why it takes six months for you to see that initial score. But while that six months is underway, borrowers need to ensure they are making smart decisions. There is no automatic credit score that borrowers are assigned for the first time. That initial score looks at your payment activity, how many times you have applied for new credit, and all those listed above. So now is a great time to focus on all those factors that affect your credit score.
- Ideal for: Anyone who wants to take on credit and develop a credit score.
- Ease of Implementation: Easy, especially if you learn how your credit score is calculated from the get-go.
- Timeframe for results: Immediate. Understanding how your credit score is calculated is finance fundamental.
- Cost: None!
- Risk: Low.
- Sustainability: High, as once you know the game's rules, you can apply it to all future financial decisions.
- FinImpact Score: 2
10. Once you have a credit score, check it often
Keeping an eye on your credit score is almost as important as monitoring your credit report each year. But, regarding your credit score, you may be able to access it as often as once a month or more. Many banks and creditors now offer free access to your credit score as one of their perks. So, get in the habit of checking periodically to see how your score is trending.
- Ideal for all borrowers. Checking your credit score periodically helps you ensure lenders analyze your borrowing behavior accurately.
- Ease of Implementation: High. Many banks and creditors offer free access to your credit score. You can also sign up for a credit monitoring service through one of the bureaus, Experian, Equifax, or TransUnion.
- Timeframe for results: Your score is not penalized for checking it regularly. Remember that your credit score updates every 30 to 45 days, so it might be a few weeks before you see a change.
- Cost: Free. You can access your credit report annually via annualcreditreport.com, which provides access to your score. You may also access your score for free through your bank or one of the previously mentioned monitoring services.
- Risk: Low. Your credit will not be negatively impacted if you check your credit score or report.
- Sustainability: Checking your credit score is a habit that all borrowers should get into.
- FinImpact Score: 3
How Long Does it Take to Build Credit With a Credit Card?
It generally takes about six months to generate your first credit score. However, the clock doesn’t start ticking until you have opened a credit card account or taken on some other form of credit. The bureaus will be looking to see how well you manage your monthly payments and whether you are keeping your credit utilization at 30% or below. As we shared earlier when we explained the factors that go into your credit score, payment history, and credit utilization combined represent 65% of your score.
The impacts of a credit card in those first two months
Applying for a credit card will initially ding your credit score by about five points. This is the result of the hard credit inquiry that creditors undertake when trying to determine your creditworthiness. And this ding will sit on your credit for up to two years. Your new credit may also experience a hit, especially if you have recently applied for multiple credit cards. But, if this is your first credit card or you haven’t applied for a card in a while, your new credit card may help your score.
The impacts of your credit card over time
As soon as you get it, it isn’t a bad idea to make a small purchase or two. Then, pay your balance in full or the minimum monthly balance each month. This practice helps in two ways:
- Let’s you develop a history of on-time payments, which represents 35% of your credit score
- It shows that you can balance your utilization (the amount you owe compared to your credit limit), which represents 30% of your credit score
Building credit quickly with a credit card
The best ways to build your credit quickly using a credit card, is to follow these steps.
- Make purchases and pay on time, all the time - Payment history is a whopping 35% of your FICO score.
- Open a card but don’t use it - this might seem counterintuitive, but it works! Though this method works a bit more slowly than other methods to build credit fast, it helps keep your utilization in line and shows that you are not desperate to use the credit you have.
- Become an authorized user on someone else’s credit card - this is a great way to piggyback on someone else’s good financial decisions.
- Don’t max out your limit if you decide to use the card - your credit utilization is the ratio of your total balance owed to your total credit limit. Keeping your credit utilization below 30% is generally a good idea.
Challenges Faced by People with no Credit History
Just as making poor credit decisions can get you into trouble, having no credit history can be just as costly. Consider these repercussions commonly faced by those who either don’t yet have or choose not to have a credit history.
- Buying a house becomes infinitely harder unless you have enough cash to pay for the house; creditors may not want to offer you a mortgage
- You may be required to pay deposits for your utilities, rent, and more.
- It will be hard to qualify for credit cards.
- Borrowing money will be more expensive because those creditors who might be willing to give you a loan will likely charge a higher interest rate
- Even getting a cell phone might be more expensive as the carrier may expect you to pay for the phone in full at the beginning of your contract
Tips for Responsible Credit Use
To quote Stan Lee, with great power comes great responsibility. And this is certainly true when it comes to responsible credit use. Here are some ways to help you learn how to be responsible with your credit so that you can grow your credit score and someday be eligible for a personal loan for good credit.
- Understand how your credit score is calculated. Remember that 65% of your score alone is determined by how well you make your minimum monthly payments and manage your credit card utilization.
- Have a steady source of income. Though your income is not part of your credit score calculation, creditors will ask you about your income as part of the application process. Creditors don’t like to see someone who jumps from job to job (unless in the same field with a consistent or growing income level) or has an inconsistent income.
- Protect your personal information and check your credit report annually via annualcreditreport.com.
- Apply the 50/20/30 budgeting rule to your lifestyle. Whether you choose this method or take a different approach, a budget can ensure you don’t bite off more than you can chew.
- Always, always, always make your payments on time. Remember that payment history represents 35% of your credit score. And when you can pay more than the minimum due, this will help you save money on interest over time.
- Keep that credit utilization under 30%. For example, if your secured credit card credit limit is $1,000 and you have a $300 balance, your debt-to-credit ratio is 30%.
- Monitor your credit score each month via one of the credit bureaus; Experian, Equifax, or TransUnion.
- Sign up for Experian Boost. This is a great way to get credit for those monthly expenses that aren’t typically reported to the credit bureaus.
How to Leverage Different Types of Credit to Maximize Financial Success
Traditional credit cards are one form of credit affecting your credit score. This said, credit such as trade credit, bank credit, revolving credit, etc., can also impact your score. Here are some terms and phrases that you should be aware of.
Consumer credit allows consumers to borrow money or incur debt related to the purchases of goods or services and to defer repayment of that money over time. The cost of education is an example of consumer credit.
Trade credit is similar to consumer credit, except it's between a retailer and the supplier who sells them inventory. Promissory notes, trade acceptance, and open accounts are all examples of trade credit. It’s important to note that sellers can report delinquencies on trade credit, which may affect a buyer's credit rating.
Bank credit comprises the total amount of funds financial institutions advance to individuals or businesses. Types of bank credit include car loans, credit cards, mortgages, and business lines of credit.
Revolving credit lets consumers borrow money up to their maximum credit limit, pay it back over time, and borrow once again as needed. The two most common types of revolving credit are personal lines of credit and credit cards.
Open credit, sometimes called open-end credit, is an agreement between a financial lender and borrower that allows the latter to access credit repeatedly up to a specific maximum limit. Credit cards are the most common type of open credit.
Installment credit is when a borrower accepts a loan for a fixed sum of money and agrees to make monthly payments until the loan is paid off. A mortgage, auto loan, or personal loan for excellent credit are examples of installment loans.
What Are the Three Credit Bureaus?
The three credit bureaus are Experian, Equifax, and TransUnion. When a creditor looks at your credit report, they usually look at information from all or one of the bureaus based on their preferences. All three credit bureaus are the same in that your credit report will contain the following information.
- Your personal information
- A summary of your accounts
- Public records such as judgments, tax liens, or bankruptcy
- Inquiries on your credit file
Each bureau scores just a bit differently, however. This is why your credit score may vary from bureau to bureau. Equifax, for example, clearly distinguishes between open accounts and closed accounts. This can make it easier for creditors (and borrowers) to distinguish the information and select which accounts you want to examine first.
Experian clearly shows a status detail that indicates when an account is scheduled to fall off your credit report. This can make it easier for those who have experienced bankruptcy to know when it fell off their report. And TransUnion has the most thorough and robust employment section. Though this information is not included in your credit score, it makes it easier for potential employers to see your job stability.
How to Monitor Your Credit
It is recommended that borrowers check their credit score every one or two months and their credit report at least once per year. Many banks and credit card companies offer free access to your credit score. However, if you don’t yet have a credit card or your bank doesn’t offer this service, you can access your credit score for free via one of the credit monitoring services available through the bureaus, Experian, Equifax, or TransUnion.
Even though your score is only updated every 30 to 45 days, checking your score periodically can help you see if something has gone wrong. A sudden drop in your credit score that you did not anticipate might indicate you missed a payment or were the victim of identity fraud. If you see a major change to your credit score, especially one where your score is headed south, it is time to check your credit report and scour it for errors. You can access your credit report for free once per year at annualcreditreport.com.
As you can see, building credit without a credit card is possible. The best ways to do this are by being added to someone else’s card, taking out a personal loan for fair credit, or following one of the other recommendations in this article. However, paying your bills on time each month is the most important thing you can do with whatever credit you take on to build, if not improve, that credit score.