A good credit score is one of the best financial assets you can have. With a good credit score, you’ll have an easier time getting approved for loans and you’ll qualify for lower interest rates. You’ll enjoy lower insurance rates and no security deposits when you have utilities established in your name.
Building credit from scratch is tough because you need active credit or loan accounts to get a credit score. But, it’s hard to get approved for these accounts without having credit already.
While a credit card is one of the easiest ways to build credit, many people want to avoid credit cards. And understandably so. With credit cards comes with a risk of getting into debt or other financial troubles. There are financial experts like Dave Ramsey who are firmly against credit cards. You can build credit without a credit card, but it may not be as easy.
Here are some options you can use to build credit without a credit card.
Federal student loans
Federal students loans (as opposed to private student loans) typically do not require a credit check. You only have to be enrolled at least part-time in an eligible institution. These loans can help you build credit since they report to the credit bureaus. While you’re still enrolled in school, the loans will have a deferment status. After graduation, you’ll enter repayment and your monthly payments will help you build your credit score as long as you’re on time each month.
Note that it’s easier to build credit with federal student loans than private student loans. Private student lenders usually won’t approve you without an established credit history and qualified income.
Private student loans
You may be able to borrow a personal loan from a bank or credit union. A personal loan is a type of unsecured loan. Banks typically won’t be willing to lend you a large amount since you haven’t established a credit history yet. When you’re just starting to build your credit, the amount doesn’t matter. Just make sure you make your monthly payments on time each month to establish your credit history.
Some credit unions have a version of the personal loan that’s specifically designed to help new borrowers build their credit. These credit builder loans are secured by money in a savings account. You make regular payments on the loan and, as long as you don’t default, the collateral in the savings account is yours.
A mortgage or car loan
Qualifying for a major loan like a mortgage or car loan is difficult without a prior credit history. Still, with a good income, down payment and additional assets, the bank may be willing to approve your application.
Get a cosigner
If you can’t qualify for a loan on your own, you may be able to get someone to cosign for you. The person who cosigns with you needs to have good credit to qualify for the loan. Note that your cosigner is also held liable for payments on the loan. Any late payments will affect the cosigner just like they affect you. And, if you ultimately file bankruptcy, the cosigner is on the hook for the entire debt unless they also file bankruptcy.
Watch Out for Scams
Beware of advance fee loans and other loan scams that prey on people with no credit or bad credit. These loans typically guarantee approval and ask for some type of upfront payment.
Less Reliable Ways to Build Credit Without a Credit Card
Renters may be able to use their monthly rent payments to help build credit when landlords reports payments through Experian RentBureau. Only a portion of landlord’s report this data and only to a single credit bureau; Experian doesn’t share rental tradelines with the other two major credit bureaus. If you’re a renter, check with your landlord to see whether your timely rental payments are being reported to Experian each month.
You can also use a service like Rent Reporters to report your rent payments the credit bureaus. These tradelines will help you build a credit score.
Be clear about types of financial products and services that typically do not help you build credit: utility services, phone bills, insurance payments, having a job, having a checking account, a debit or check card, a prepaid card, rent-to-own arrangement, or a payday loan.
As long as you’re in good standing with these accounts, they don’t affect your credit. However, if these accounts go into default and are sent to a collection agency, they will affect your credit. A debt collection will establish your credit history, but not in a good way. A collection account will build your credit, but it will build a negative credit history that you’ll have to work harder to overcome.