The financial world can be a challenging place for young adults starting out in life or for people getting a fresh start.
That’s why building your credit can be slow. The best way to establish credit is with a loan or another type of credit account, but many banks won’t give you those accounts unless you already have decent credit. In other words, you need credit to get credit.
Most people will tell you to start building your credit by getting a low-balance credit card. But if you’d prefer to stay away from credit cards, you aren’t out of luck. Here is how to build credit without credit cards.
Which Payments Improve My Credit Score and Which Don’t?
Credit is based on your record of making on-time payments. But not all payments count toward your credit.
Payments will only help you if they’re regularly reported to the major credit bureaus. For the most part, living expenses like rent, insurance, and utilities aren’t reported to credit bureaus.
The payments that are reported are typically payments associated with lending transactions. For example, loan payments, mortgage payments, and credit card payments are the most common.
How To Build Credit Without Credit Cards
While just about any installment payment will help your credit, some are more achievable and less expensive than others. Consider these strategies to build your credit.
1. Use a Credit-Builder Loan
This is a lesser-known solution for building your credit. A credit-builder loan serves the sole purpose of improving your credit score. You’re most likely to find them at smaller financial institutions like credit unions rather than major banks.
With a credit-builder loan, you take out a loan but the lender puts the money into a CD or account you can’t access. You make monthly payments and when the loan is paid off, you get the money from that account. You also get any interest your money has earned.
These low-interest loans have little risk for the lenders because you can’t take the money out easily. As a result, they’re easy to get with poor credit or no credit.
2. Get a Secured Credit Card
When talking about credit cards, most people think of an unsecured line of credit. But there’s another version of a credit card called a secured credit card. To use it, you guarantee the credit line with a deposit in an amount equal to the credit available to you.
For example, if you get a secured credit card with a limit of $300, you would need to deposit $300 to the lender for them to hold. The advantage of a secured credit card is that it’s reported to the major credit bureaus and can increase your credit score.
If you’re starting out, it could be worth setting aside funds for a secured credit card.
3. Finance a Vehicle
Vehicle financing tends to be easier to get than some other types of loans for a simple reason: collateral. The lender knows that if you ever stop making payments, they can repossess the car. That keeps their risk low so their credit requirements are low, too.
Don’t buy a vehicle for the sake of boosting your credit. Remember that vehicles also cost you in the form of registration fees, insurance, fuel, repairs, and more. If you want to boost your credit and a vehicle could come in handy, though, go for it.
As with a personal loan, make sure your auto loan is modest enough for you to afford. If it is, you get a vehicle and a higher credit score at the same time. It’s a win-win.
4. Use a Rent Reporting Service
As we explained above, typical cost-of-living expenses aren’t usually reported to the credit bureaus so they don’t help your credit score. There are services that can change that, though.
A rent reporting service is just that: a service that tracks your rent payments and reports them to the credit bureaus. You get to boost your credit score without adding credit card accounts to your portfolio.
Keep in mind, you may need to get your landlord to verify your rent payments each month. Sometimes your payments won’t be reflected on your credit report without landlord verification.
5. Try Specialized Credit Improvement Programs
Rent reporting services are great, but there are other services that take it a step further. Consider an option like Experian Boost for example.
When you sign up for Experian Boost, you link the bank accounts you use to make your payments like rent and utilities. When you make your regular payments for those monthly living expenses, the program records it. As one of the major credit bureaus, Experian will add those payments to your credit file to boost your credit.
Building Credit the Smart Way
So many people try to build credit with credit cards but find that it backfires. The cards may tempt them to spend more money than they should.
Regardless, those cards aren’t your only option to build credit. The tips above can help you establish a longer, healthier credit history while staying credit card-free.