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6 ways to build credit without using a credit card

November 14, 2022, 5:49 PM UTC
Photo illustration of a pattern of credit cards with one missing, replaced with a dotted line outline and a question mark in the middle.
Report rent and utility payments to the bureaus is another way to build credit.
Photo illustration by Fortune; Original photo by Getty Images

Creditworthiness is something every financial institution considers before lending money to someone.

A credit report that shows responsible credit usage can make borrowing money to buy a house or a car more affordable through lower interest rates. It can also be evaluated by employers when you apply for a job, landlords when you want to rent an apartment, and auto insurers when they set your rates. 

“We’re using credit every single day,” says Jeanne Kelly, a New York–based credit coach and founder of the Kelly Group. But everyone starts with a blank slate, and building credit can take time to build.

What credit score do you start with?

Credit scores are three-digit numbers created from the information on your credit report, including payment history and the amount of outstanding debt you have. The score tells lenders how likely you are to repay what you borrow.

To have a score, your credit report needs to show one or more accounts that are at least six months old and at least one account that’s been reported to one of the three credit bureaus—Equifax, Experian, or TransUnion—in the last six months.

Credit scores range from 300 to 850. A lower score indicates there’s a greater risk of not paying your bills, based on your history. “Without good credit, you may get a high interest rate, or worse, you may not even qualify for the loan,” says Lyle Solomon, principal attorney at Oak View Law Group, a California-based firm specializing in consumer finance.

A good credit score, according to the Fair Isaac Corporation (FICO) scoring model, is 670 or higher. Another scoring model that financial institutions use is VantageScore, which considers 661 or higher a good score.

6 ways to build your credit without a credit card 

Opening a credit card, making purchases, and paying off your balance each month is a common way to build credit from the ground up. But it’s not the only way. 

In fact, 10% of your FICO score is based on your “credit mix,” or which types of loans or lines of credit you have. When you’re just starting out and have little, if any, payment history, your credit mix matters even more, according to MyFICO.com.

Here are six alternatives to opening a credit card to build credit.

1. Credit-builder loan

A credit-builder loan essentially allows you to lend yourself money, Kelly explains. It’s an installment loan with fixed monthly payments, but instead of giving you the cash upfront, the lender deposits it into a savings account or certificate of deposit (CD). 

Some banks withhold access to the account until you pay off the loan completely, while others will release some funds monthly if you’re making on-time payments. “The good thing about that is you’re showing a payment history, and the money will come back to you, and that’s why it’s a loan to yourself,” Kelly says.

However, these loans often charge interest and an origination fee, so be sure you understand the total costs before getting one.

2. Personal loans

Personal loans, which can be secured or unsecured, allow you to borrow a large or small amount of money to use for anything. You repay the loan in fixed installments over several years. The lender reports the balance and your ongoing payment activity to the credit bureaus.

With a low credit score, or none at all, it can be difficult to qualify for a personal loan with a competitive interest rate. Asking a trusted friend or relative who has good credit to cosign the loan could help you get approved and may lead to a better interest rate. 

However, Kelly warns, the cosigner should be prepared to step up if you can’t make a payment on time, since a late or missing payment affects their credit too.

3. Car loan

A car loan is money you borrow from an auto dealer or third-party lender to buy a car. Usually it requires a cash down payment, although that’s not always the case. And with no credit history, you may want to add a cosigner to qualify for a better interest rate.

Payments are part interest and part principal, and due on the same day every month until the balance is repaid. If you miss a payment, the lender may be able to repossess your car. It’s similar to a mortgage in this way, since the loan is secured by a physical asset. Like other loans, the lender is responsible for reporting your car loan payments to the credit bureaus. A history of on-time payments will boost your credit score.

4. CD loan

A CD is like a savings account, except your money is locked up for one to five years. The tradeoff is that you can earn more interest than you would keeping your cash in a traditional savings account. You can always withdraw your money early, but you’ll pay a penalty.

A CD loan is when you take out a loan and use the CD as collateral. That means you get a cash lump sum and then repay what you borrowed, plus interest, to the bank each month. If you miss payments, the bank can take your CD and may even charge a penalty, Solomon says. “Using a CD-secured personal loan to improve your credit score will work only if you make the payments in full and on time,” he adds.

5. Federal student loan

The U.S. government lends money to students to pay for undergraduate and graduate degrees and career certification programs—and you don’t need a credit history to qualify. 

Unlike private student loans, there’s no credit check to get most federal student loans. Instead, eligibility is based on citizenship, enrollment, and in some cases, financial need, so it can be a good avenue to start building credit early.

On-time payments will boost your credit score, while late or missed payments will have a negative impact. “Student loans can also help you improve your credit score by boosting your average account age and diversifying your credit mix,” Solomon says.

Some student loans don’t enter repayment until after the borrower leaves school, known as forbearance. Even if you aren’t actively making payments during forbearance, the loan will still show up on your credit report as being in good standing.

6. Peer-to-peer loans

Peer-to-peer (P2P) lending platforms help you borrow money from individuals rather than a bank or credit union. Investors lend money and earn a profit from the interest you pay on the loan. 

“Generally, P2P lenders look for scores in the fair to excellent range, meaning 580 or above,” Solomon says, so you’ll need some credit history to be eligible. “As the entire process is online and streamlined, you can get a loan in only a few days if you qualify,” he adds.

Another benefit is that P2P lenders perform only a soft inquiry to check your credit report, Solomon says. Traditional lenders usually perform a hard inquiry that could ding your credit score.

A downside of using P2P platforms is that they may send your account to collections more quickly than a traditional lender if you miss a payment.

Other options

If you’re looking to potentially fast-track the process of building credit—or you’re wary of borrowing money just yet—here are some additional strategies for boosting your score. 

  • Piggyback on someone else’s good credit: Many credit card companies allow cardholders to add authorized users to their accounts. As an authorized user, you may get a card to use for purchases, but the primary account holder is ultimately responsible for making payments. The potential benefit to you—assuming the primary account holder is a responsible borrower—is that their credit account will show up on your credit report, along with payment activity. But not all lenders report authorized users to the credit bureaus, Kelly says, so make sure this is an option before entangling with another borrower.
  • Report rent and utility payments to the bureaus: The three major credit bureaus don’t require rental or utility payment activity to be reported by landlords and property managers, but they will welcome the information when it’s submitted. If you pay your rent and utility bills on time, consider asking your landlord whether they can report your payments to the credit bureaus, or do it yourself. There are several online services—many are free, but some charge a one-time or monthly fee—that you can sign up for. Some of them will even report the last two years of positive payment history.
  • Report recurring bills to the bureaus: Reporting recurring payments, such as streaming subscriptions and cell phone plans, are another way you may be able to prove reliable bill pay. Various online services, including one offered directly by the credit bureau Experian, let you connect the bank accounts you use to pay your recurring bills and then report those with positive payment history to some or all three of the credit bureaus. 
  • Pay bills on time: The most important factor when it comes to building good credit is debt payment history, accounting for 35% of your FICO score. Making full, on-time payments on every loan or line of credit is imperative to maintaining strong credit.

The takeaway

The best way to build credit is to borrow money and pay it back on time. You can do that through credit cards or installment loans, though it may be difficult to qualify for either if you don’t have credit history to back you up. The solution may be starting with options that don’t require a credit check, like federal student loans or credit-builder loans, or options that ask for collateral in exchange for a lower interest rate, such as CD loans. 

You can also sign up for a service that reports non-debt bills that you’re consistently paying on time, such as monthly subscriptions or rent, to the credit bureaus. “These are things that can work just as fast [as loans] and they’re inexpensive,” Kelly says. “They’re building blocks.”

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