When people are trying to build credit, typically they will use a credit card to establish that they are a good credit risk. They might start with secured cards, or become co-signers on the accounts of other users with good credit. However, getting a credit card can become a life-long commitment, getting you into debt that might take many years to pay off. It’s good to be careful before using credit card debt to establish a credit history.
So what can consumers use, if not credit cards, to build good credit? When building credit without using a credit card, there are several options to consider:
Any loans you may have, whether they are auto, mortgage, or student loans, must be paid on time in order to establish a good credit history.
If you already have one of these kinds of loans, you already have a way to build credit without adding a credit card to the mix. By making timely payments, you are proving every month that you are a good risk, and your credit score will reflect that.
There is a very important thing to know that affects this and all of the other methods listed below. In order to create a credit score, the credit bureaus need to have at least six months’ activity on your credit history, and no deceased indicators on your credit file.
That last part is easy—you need to still be alive. But some consumers stumble with the other part. An inexperienced borrower might think that repaying an installment loan in full very quickly would demonstrate great repayment habits, but it does the opposite. If you pay off an installment loan in less than six months, it may drop off of your credit file entirely, so you lose any positive credit history you might have gained. (Note, do not mix up this concept with credit card usage, there is NO need to “carry” revolving credit card balances to establish a credit history, simply use the account, and pay it off in full each month. Use of the account a couple of times a year from these transactions establishes a credit history without incurring finance charges).
The lesson is to keep your credit history active—repay a credit-builder loan (see below) on schedule, not ahead of time.
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A credit-builder loan is a very small loan, usually around $1,000. The sole purpose of the loan is to prove you can repay a debt, so you don’t actually get the money you’re borrowing in most cases—the financial institution sets aside the money for you, and you pay them back. Once the loan is fully repaid, you get the money. It’s a lot like building up savings, like you would with an emergency fund, but you also get good credit history out of it (assuming you make all your payments on time).
Some banks or credit unions might offer a small secured loan option as a credit-builder loan. Be aware, though, that not every financial institution offers any kind of credit builder loan—in fact, most do not. Your best bet for getting a credit-builder loan is to check with a local credit union or Community Development Financial Institution (CDFI).
Another option that is gaining popularity is reporting a consumer’s rent payments to the credit bureaus. Traditionally, we don’t get positive credit history from making our rent payments on time every month. Now, thanks to a growing trend in the credit industry, there are services available to make a consumer’s consistent rental payment history appear on their credit reports.
The catch with this method is that your landlord may have to participate. They must report your payments to one of the services available to get your rent payments on your credit reports. Or they must use a payment service that reports your rental payment history automatically. Experian’s RentBureau makes it easy for landlords to find a service that can handle rent payments for them and do the credit reporting so they don’t have to do any extra work.
There are also services that allow you to report your own rent payments, but they are not free—usually these services carry a monthly fee. Some of the most popular rent reporting services are Rental Kharma, Rent Reporters, and RentTrack.
This method used to be a popular way to help consumers establish a credit history. A young person or newly married couple just starting out would buy furniture or a major appliance they need—like a refrigerator or washer & dryer. They’d get an installment loan from the seller to finance the purchase, and in the process establish that they can repay a debt.
Today, most places that sell furniture or appliances will sign you up for an affinity credit card rather than offer you an installment loan. But if you can find a retailer that still sets up loans to finance larger purchases, you can still make a go of this method to build credit without using a credit card.
This kind of loan, also called P2P (peer-to-peer) lending or crowdlending, is a loan made to and from individuals through an online service. Borrowers create a profile on a website explaining how much money they need, and what for. The lenders review the profiles and credit assessments of the borrowers and decide whom they want to lend to through the service. Lenders will diversify their money among many different loans, and if enough lenders get on board with a particular loan, the borrower gets their funding.
The online service handles all of the payments, credit reporting, etc. The two largest peer-to-peer lenders in America are Lending Club and Prosper.
Because tens of millions of consumers lack enough credit history to qualify for products like credit cards, the lending industry is building alternative credit solutions. Alternative credit helps evaluate the creditworthiness of borrowers using information like utility payments and cell phone plans. If a consumer can pay all of their conventional bills on time every month, it should reflect well on them when they go to borrow money from a financial institution.
While there are consumer-focused alternative credit products like PRBC, it’s mostly your lenders who will take advantage of alternative credit in order to grant you loans or other credit products. Services like FICO XD and CoreLogic Credco already exist for financial institutions to use when making decisions about lending and credit.
If you are in a position where you need a lender to rely on alternative credit data before extending a loan to you, ask around to find a lender that uses this kind of information as part of their lending process.
While there may be some hurdles to overcome, it is possible to build credit without using a credit card. It’s important to understand how your credit works and what the best steps to take to improve your score and establish the best possible credit history. A credit report review is a great idea for anyone looking to establish or build positive credit.
