How to Build Credit without a Credit Card

Getting your first credit card is a true “Catch-22” situation. After all, you need credit to get a credit card – or any other type of financing – but you can’t get credit until you get a credit card. So how do you build credit without a credit card?

There’s little doubt, credit cards are one of the fastest ways to build credit – especially once you have two or three. But getting to that point is the challenge. 

If that’s where you’re at right now, any of the seven strategies below will help you get to where you want to be. If you can use two or more, you can build credit better and faster.

Table of Contents
  1. Avoid Bad Credit
  2. Try Experian Boost
  3. Get a Secured Loan
  4. Get a “Credit Builder” Loan
  5. Get a Secured Credit Card
  6. Take a Federal Student Loan
  7. Become an Authorized User on Someone Else’s Credit Card
  8. Frequently Asked Questions
  9. Bottom Line

Avoid Bad Credit

This is the real starting point for anyone who is new to credit. And if you think about logically, it makes perfect sense. After all, the only thing worse than having no credit is having bad credit.

As strange as it sounds, it’s not at all unusual. You see, there’s a non-reciprocal arrangement with many payment situations. Many vendors, like utilities, landlords, and internet and cable services, won’t report your good payment history to the credit bureaus. But they will report your account if it’s charged-off or goes in the collection.

If you’re hoping to build credit, you’ll need to avoid that situation with any payment arrangements you have. Pay all your bills on time and avoid the dreaded no credit/bad credit combination. It’s an even bigger hole to climb out of than a simple no credit situation.

Try Experian Boost

Experian is one of the three major credit bureaus (in fact, it’s the largest), and they offer their Experian Boost program to help you build or improve your credit.

You can sign up for the program free of charge. Once you do, they’ll scan your bank statements for recurring payments. Those can include payments for utilities, phone service, Internet, and streaming services. They’ll then add those payments to your credit report.

As good as that sounds, there are a few limitations. First, the credit enhancement will appear only on your Experian credit report, but not those issued by Equifax and TransUnion. Second, it won’t be much help if you have a pattern of late payments on those bills. Third, the program is designed to increase an existing credit score. It’s not clear how much benefit it will provide for someone with no credit.

Carefully evaluate your payment history before signing up for the service.

Here’s our full review on Experian Boost.

Get a Secured Loan

Surprisingly, it can actually be easier to get a secured loan than a credit card. The reason is in the word “secured”. It means the loan is backed by collateral, which makes it less risky for the lender.

Examples include taking a loan to buy a car, computer, or furniture. The lender will likely set you up with an installment loan, which means you’ll make fixed monthly payments until the loan is paid in full.

Most lenders will report your payment history to the major credit bureaus, helping you to build credit and a credit score. Your credit profile will be even stronger when you’ve paid off an installment loan. That’s because the credit bureaus judge a paid loan is one of the strongest indicators of good credit.

There are a few points to be aware of with secured loans:

  1. Since you have no credit established, you’ll need to be steadily employed with an income level that can comfortably accommodate the monthly payment.
  2. You may need to add a co-borrower on your first secured loan.
  3. A mortgage is an example of a secured loan, and you may be able to qualify even if you don’t have established credit. Mortgage lenders have programs specifically for borrowers who don’t use credit.
  4. Go slow with installment loans. Take one and pay it off before you take a second. Each loan will be easier to get with a good payment history on the one before it.

With that said, strategies 3 and 4 below are types of secured loans specifically designed for people without credit.

Get a “Credit Builder” Loan

These loans are frequently offered by banks and credit unions to help their depositors build credit. They work by taking a loan against savings deposited in the bank or credit union. But don’t worry, you can get a credit builder loan even if you don’t have money for a savings account.

It works like this:

You apply for a credit builder loan for say, $2,000. The lender approves your application and establishes a 24-month installment loan at 7%. 

But instead of turning the loan proceeds over to you, they’re instead deposited into a savings account in your name. The savings account will act as security for the credit builder loan, so you won’t be able to withdraw funds while loan is outstanding.

Your job will be strictly to make the monthly payments, which the bank or credit union will report to the major credit bureaus. Over time, you’ll begin to build a credit score based on your good payment history.

You’ll get help with making the payments too. You can have them withdrawn from your savings account each month. You’ll be responsible only to cover the interest portion of the loan – the principal will be fully paid out of your savings account.

Here’s more information about this type of account.

Get a Secured Credit Card

Much like credit builder loans, secured credit cards are becoming increasingly popular. They’re offered by a growing number of banks and credit unions.

Secured credit cards work much like credit builder loans, except you will need to come out of pocket for the security deposit. The amount of your credit limit will match the deposit in most cases. 

For example, by making a deposit of $1,000, you’ll be given a credit limit of $1,000 on the credit card. And in many cases, you’ll be able to increase your credit limit by making an additional deposit.

As you use the card and make your monthly payments, they’ll be reported to the credit bureaus, helping you to build credit. Some issuing banks will even remove the security deposit requirement with a satisfactory payment history for a certain amount of time, like 12 months. At that point, your deposit will be refunded to you.

The Discover it Secured Credit Card is an example of a secured credit card. They’ll even pay 2% cash back on up to $1,000 in gas station and restaurant purchases each quarter, plus unlimited 1% on all other purchases.

Here’s more on how to build credit with secured cards.

Take a Federal Student Loan

This strategy specifically applies to federal student loans, since creditworthiness isn’t a criterion for qualification. However, with private student loans – typically issued by banks – credit qualification will be required.

Federal student loans are designed specifically for people who are just starting out in life. If you meet the other eligibility criteria, your credit history won’t be a factor.

But once you take a student loan and begin making payments, you’ll begin to build credit and a credit score.

Become an Authorized User on Someone Else’s Credit Card

Though this is a popular strategy to help you build credit without credit cards, it’s not as reliable as others on this list.

When you become an authorized user, another party is granting you the right to use their credit card for purchases. But it doesn’t obligate you to make payments on the account.

Because you don’t have responsibility for payments, many credit card issuers won’t report the account in your name. But if you can find one that will, it can be an excellent way to jumpstart the credit building process.

However, there is a major risk with this strategy, even and especially if the credit card company reports it under your name. If the primary user has a spotty or poor payment record, that will be included on your credit report as well. You’ll get a bump from the authorized user status, but you’ll take a big hit from the late payments. Tread lightly with this one.

Frequently Asked Questions

What is the Fastest Way to Build Credit?

The fastest way to build credit is likely to come from using one of the secured credit strategies. Whether it’s a secured installment loan, like a car loan, a credit builder loan, or a secured credit card, the immediate payment track record will enable you to build credit in the shortest amount of time.

At the opposite end of the spectrum, federal student loans can be slow. That’s because they’re usually accompanied by a payment deferral period that can last several years.

Can I Build Credit with a Debit Card?

Unfortunately, the answer is no. That’s because debit cards are not financing arrangements. They simply give you access to the funds you have on deposit at a bank or credit union. There are no payments to be reported to the credit bureaus.

How Long Will it Take for me to Build Credit Using any of the Methods Above?

If you currently have no credit, you should expect at least six months to pass after implementing one of the strategies in this guide to begin producing results.

Before the credit bureaus can calculate a credit score, you first need to demonstrate the ability to make regular payments. That will generally take at least six months.

But even after six months have passed, you may have only a low credit score. That’s because a single loan has a low impact. Generally speaking, you won’t see your credit score climb into the mid-or upper-600s until you have at least two or three credit lines outstanding, with a payment history going back 12 months or more.

Bottom Line

As you can see, building credit without a credit card can be a slow process. If building credit is your goal, you should get started today. Luckily, you don’t need much of anything to get a credit builder loan, so there’s no reason to delay.

The sooner you get your first loan in place, the sooner you’ll begin to build credit. And as you do, you won’t need to apply for credit cards – the credit card companies will begin filling your mailbox with credit card offers.

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About Kevin Mercadante

Since 2009, Kevin Mercadante has been sharing his journey from a washed-up mortgage loan officer emerging from the Financial Meltdown as a contract/self-employed "slash worker" – accountant/blogger/freelance blog writer – on OutofYourRut.com. He offers career strategies, from dealing with under-employment to transitioning into self-employment, and provides "Alt-retirement strategies" for the vast majority who won’t retire to the beach as millionaires.

He also frequently discusses the big-picture trends that are putting the squeeze on the bottom 90%, offering workarounds and expense cutting tips to help readers carve out more money to save in their budgets – a.k.a., breaking the "savings barrier" and transitioning from debtor to saver.

Kevin has a B.S. in Accounting and Finance from Montclair State University.

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