When you want to establish credit, the first thing that comes to mind is getting a credit card. But here's the thing: If you've been burned by credit in the past, are young and just starting out, or are new-to-the-country, it might be tough-going to get your hands on a credit card. That's because credit card companies are reluctant to offer a line of credit if your score is not-so-great or you don't have much of a credit history.
While building credit with a credit card is a common way to establish a solid credit score, it's not the only way. If you're interested in being in-the-know on how to build credit without a card, here are six ways you can go about it. We'll also offer a few of our favorite tips on how to boost your credit.
1. Apply for a personal loan
Along the same lines as a car loan, a personal loan is a type of installment loan. You’ll receive a single lump sum upfront, and agree to pay off your loan in monthly chunks over a set period of time. Personal loans are also reported to the credit bureaus, and your payment history shows up on your credit score.
Besides staying on top of your payments, make sure that you can reasonably make your payments. You should also be absolutely sure you need that money. If it just sits in your checking account, you're taking out too much, and that will cost you in interest fees.
2. Get a car loan
Financing a car and staying on top of your payments can help you boost your credit score. Installment loans, revolving credit, and collections are reported to the credit bureaus and show up on your credit report.
When applying for a car loan, lenders will need to do a hard pull on your credit, which can negatively impact your credit score. In turn, you'll want to apply for loans within a 14 or 45-day window. That way, all your inquiries will count as a single inquiry. Alternatively, you can shop for auto loans through myAutoloan.com, which screens loan offers for you based on information you report and offers you four of the best ones. The lender you pick may still do a hard credit pull, but you won't have to worry about getting your loan shopping done within a limited time window.
3. Get a credit builder account
For those who are brand-new to credit or have a not-so-great credit score, a credit builder account can help you get started on building your credit.
With a credit builder account, you select a "deposit" that's equal to the amount of the loan. So if you select a $500 deposit, that's the amount of your loan. Put in $1,000, and you have a $1,000 loan. Similar to other installment loans, you make monthly payments, which are reported to the credit bureaus. After you're done with your payment plan, interest and fees will be reduced from the final balance.
One of the most popular companies for this kind of account is Self, which has tiered plans to help you report financial responsibility to the major credit bureaus. For as little as $25 per month1 you can get a 24 month loan that pays you $520 at the end of your term. There is a $9 administration fee, and the APR on the credit builder accounts are generally below 16%. Self estimates your total cost for the loan is $89, and Self estimates the average credit score increase from a Self Credit Builder Account is 32 points (results may vary).
4. Report alternative payments
Your utility and rental payments usually aren't reported to the credit bureaus. But in recent years, it has become an option. The thing is, you would need to work with a third-party to have these alternative payments reported and show up on your credit report.
These third-party services track and report your credit to the bureaus. You usually have to pay a one-time installment fee, plus an ongoing subscription fee. The additional cost is worth it if it can help boost your credit score. However, Experian Boost will do the work for you and report your payment activity to Experian.
5. Become an authorized user
If your spouse, relative or close friend has a strong credit score, they could add you as an authorized user to their credit card. In turn, you'll benefit from their solid credit and positive financial behaviors. They don't necessarily need to give you access to using their credit cards to make purchases, as those cards can be safely stowed away.
While each credit card issuer has their own rules and requirements, you can usually add an authorized user to your account by calling the credit card company. All you typically need to provide is your legal name, birthday, Social Security number, and mailing address.
Tips on improving your credit
We've gone over some routes to take on building credit sans a credit card. Now, let's look at ways to improve your credit.
Review your credit report
According to a study by the FTC, 1 in 5 U.S. consumers say they've found an error on their credit report. These errors, such as an incorrect payment history or missing payment history, can hurt your score. Here's how you can get review your credit report:
- Order one from AnnualCreditReport.com. Currently, weekly reports from each of the three credit bureaus – Experian, Equifax, and TransUnion – are free.
- Some free credit monitoring services offer a free credit report. While these might not be identical as the ones that come straight from the credit bureaus, they have similar information.
If you spot an error, you file a dispute by filing a claim directly to the credit bureau. The credit bureau usually has 30 days to respond to your dispute.
Stay on top of your payments
As your credit history makes up 35% of your consumer credit score, it's of prime importance to make sure you are on-time with your payments. If you're struggling with this, call your credit card company and see if you can adjust your payment due date or if they can adjust the minimum payment. It doesn't hurt to ask. Adjusting your minimum payment can help you make on time payments and keep your credit history current.
Pay off your balances
Ideally, your credit usage, which is how much of a balance you carry against the credit limit on all your cards, shouldn't be over 30%. For example, let's say your current balance is $5,000 and your total limit on all cards is $50,000. In that case, your credit usage is 10%. The lower your credit usage, the better. So keep your balances as low as possible.
Only apply for credit when necessary
As mentioned, creditors and lenders do a hard credit inquiry when you apply for a loan or credit card account. In turn, this can ding your score. Apply for credit sparingly to build your credit. You can establish credit without a credit card. Building your credit before you need it, and implementing a multi-pronged approach will help you gradually boost your score.
Frequently asked questions (FAQ)
Can you get a credit score without a credit card?
Yes, you can establish a credit score without opening a credit card account. This includes reporting alternative payments, such as your utility and rent; getting a car or personal loan, and being added as an authorized user to someone with strong credit. You don't need a credit card, as they often have high interest fees. Plus, it can be far too easy to run a high balance and fall into a debt trap. You can explore your other options.
How do I establish credit for the first time?
There are many ways you can establish credit if you have no credit or a thin credit profile. For instance, you can be added as an authorized user, get a secured card, or get a credit builder loan. These are all ways for those with low or no credit score to slowly boost their credit.
Is it easy to build credit with no credit?
Building credit when you don't have credit isn't an overnight process. It takes positive financial behaviors, such as staying on top of your payments, having a healthy mix of credit, and keeping your credit usage low, to slowly establish credit over time.
Credit Builder Accounts & Certificates of Deposit made/held by Lead Bank, Sunrise Banks, N.A., SouthState Bank, N.A. each Member FDIC. Subject to credit approval.
1 Sample loans: $25/mo, 24 mos, $9 admin fee, 15.92% APR; $35/mo, 24 mos, $9 admin fee, 15.97% APR; $48/mo, 24 mos, $9 admin fee, 15.72% APR; $150/mo, 24 mos, $9 admin fee, 15.88% APR. See self.inc/pricing
