Do you need a credit card to build credit? The reality is that it definitely helps to have a credit card when you are trying to build credit. But it isn’t 100% necessary — and in some cases, it’s either not possible, or not desirable to get one (or both).
Beyond that, paying off credit cards alone isn’t the only way — nor necessarily the most effective way — to get there. “It’s certainly important to know where and how to improve,” says North Carolina-based top-selling agent Kimberly Pappalardo, adding that “paying off credit cards might not necessarily be the best way to improve credit score.”
In order to understand that further, let’s look into the five primary factors that go into a person’s credit score, as determined by credit bureaus. They are:
- Your payment history (35% of your total score)
- The total amount you owe (30%)
- Your different types of credit (10%)
- New credit lines (10%)
- The length of your credit history (15%)
So there are a variety of factors at play, related to your habits and history — including and also separate from your credit card usage.
Overall, building credit is about being aware and informed, getting creative, and taking a range of actions. Let’s look at some of the many ways you can start building your credit right now without getting a credit card.
How to build credit without a credit card
Dispute errors on your credit report
Your own credit report should not be a mystery to you! Get a copy of your report and contest any discrepancies or errors; to make it easy, here’s a handy dispute letter template you can use.
You are entitled to a free credit report every 12 months from each of the three major consumer reporting companies (Equifax, Experian, and TransUnion). To get one, make your request through AnnualCreditReport.com (or by mail or phone, if you prefer).
Confronting any issues head-on is an important and proactive step toward building credit.
Start making all of your payments on time
If this is an area where your credit is suffering, start making your payments on time every month. Paying on time can make a big difference in your score.
Use direct deposit and reminders on your calendar to automate the process and make it as easy as possible to get it right every time.
Pay down the existing debt you have
Whether it’s student loans or a past credit card, anything you can do to eliminate the amount you owe will help your credit.
Don’t close any of your existing accounts
You might instinctively feel that closing existing accounts might be a step toward helping your credit. But in fact, the longer you can keep your accounts open, the better it looks for your score. So if possible (and logical in your situation), consider keeping those accounts alive instead.
Diversify your credit
The more different types of accounts you have, the better your credit will be — which is good news even (or especially) if you don’t have a credit card.
Make a big purchase
If you are in the position to make a big purchase — such as a house or a car — it may feel daunting, because big purchases like this can actually ding your credit at first.
But consider your time horizon: If you make your payments on time, these purchases will actually end up helping your credit long-term.
Open a store account
Some home improvement stores will offer project loans or credit accounts. Other retailers, such as supply stores, might also offer accounts you can use to build credit apart from credit cards.
Ask for your rent to get reported to the credit bureaus
Typically, rent isn’t reported to credit bureaus. But if you’re paying it anyway, why not get (literal) credit for it?
Some rent reporting services (Rental Karma, LevelCredit) can do this. You can ask your landlord about reporting, too.
Ideally, you can use the credit you build this way to invest in a home, so you’re not paying rent in the future and instead are building personal wealth through owning real estate!
Consider what other bills you can get reported
In addition to your rent, you should investigate what other bills you can get reported to credit bureaus as a way to build credit every month. Some bureaus will let you add your cell phone and utility bills to your credit report, for instance.
Get a credit-builder loan
Look into getting a credit-builder loan, which is a type of loan that is specifically designed to build credit. This way, you borrow money, but you don’t actually get to see it until you repay the loan.
Get a passbook or CD loan
If you have a certificate of deposit or savings account, you can use this to get a loan; the bank takes possession of your savings, and you get it back incrementally as you pay off the loan.
Get a secured credit card
Wait, isn’t this a list of ways to build credit without a credit card? Yes, but… a secured credit card isn’t exactly like a credit card. It’s “like a debit card that acts like a credit card and starts building your credit — it’s your own money on a card,” explains Tony Baroni, who works with 81% more single-family homes than the average agent in Tampa Bay and Orlando, Florida.
You get your deposit back when you close the account through a secured card, and it can help you build enough credit to get an actual credit card.
Get a co-signed loan
When you get a loan with a co-signer, you can take advantage of that person’s good or better credit — just be aware that they will be on the hook if you don’t pay, so this certainly needs to be someone close to you, with reciprocal trust.
Become an authorized user on someone else’s credit card
This is similar to getting a co-signed loan, except you will become an authorized user on someone else’s credit card (so you won’t have to get your own credit card… and that’s the point, here).
Become an authorized user on someone else’s bills
This strategy also works for switching a loved one’s bill over to your name — or adding yourself to it. “It’s just a couple of little things like this that can make a big difference toward establishing that credit,” Baroni says.
Get a personal loan
Some banks will still give personal loans. The advantage of getting one is you could use it to pay off debt and then have just one loan to pay back to the bank. Of course, you’ll need to pay on time for this to work as an effective credit-building strategy!
Don’t apply for new accounts back-to-back
A good mix of credit will help you — but opening a bunch of new accounts willy-nilly is not going to help. So keep your process methodical and strategic.
Keep tabs on your credit
Staying apprised of where your credit is will help alert you if something does go wrong. This way, you’ll be able to address it ASAP before it snowballs into a major credit problem.
When it comes to credit, Baroni says, knowledge is power: “We need to find out where we are so we can figure out where to go. If we have some issues going on, there’s a solution.”
Header Image Source: (Ekaterina Bolovtsova / Pexels)