How to Build Credit Without a Credit Card

Having a high credit score is an important aspect of your financial life, but building credit can take time. If you have minimal credit history, most lenders will be hesitant to let you take out a credit card or loan, making it challenging to build the positive payment history you need.

You might also prefer to avoid credit cards due to the high interest rates and risk of accumulating large amounts of debt. Let’s look at how to build credit without a credit card.

Become an authorized user on someone else's credit card

“One way of establishing credit is becoming an authorized user on a card of someone you know and trust,” says Bill Lyons, president and CEO of Griffin Funding. “If they have good credit and a positive payment history, the payment history will transfer to your credit report and, over time, improve your score.”

As an authorized user, you’ll be added to the primary cardholder’s credit card but won’t be responsible for repaying the balance. When the credit card company reports the primary cardholder’s positive payment activity, this will improve their credit score and yours. 

Apply for a credit-builder loan

If you have minimal or no credit history, applying for a credit-builder loan is one of the best alternative ways to build credit. You don’t need good credit to qualify, but you will need a monthly income. Let’s look at how credit-builder loans work and where they’re available.

What is a credit-builder loan?

A credit builder loan is similar to a reverse loan. Instead of receiving the money upfront and then repaying it, you’ll start by making fixed monthly payments and get access to the funds at the end of the term. 

These loan products tend to be small — ranging between $300 and $1,000 on average — and are designed to help you improve your credit. They don’t usually require a credit check, making them easier to qualify for than other types of loans. 

As you make payments, your lender sets aside the funds in a savings account or CD. You’ll receive the funds after you’ve repaid the installment loan, and your lender will report your timely payments to the three major credit bureaus. 

How to find and apply for a credit-builder loan

Credit-builder loans are available through many types of financial institutions, including:

• Banks
• Credit unions
• Online lenders
• Financial services that specialize in helping you rebuild credit 

However, these financial products aren’t always advertised, so you may need to ask your lender if it offers credit-builder loans.

Report rent and utility payments to credit bureaus

Your payment history accounts for 35% of your FICO score and 40% of your VantageScore credit score. So another way to improve your credit score without a credit card is by having your rent and utilities reported on your credit. 

“To get started, you should call your electric, gas, and water companies and see if they can report your payment history to your credit profile. Some companies do this, and some don't,” says Jeremy Schachter, branch manager at Fairway Independent Mortgage Corporation. “If you’re currently renting, many property management companies can report your rental history on your credit.”

Services that help report your payments

There are services available that report your rent payments to credit bureaus on your behalf. In 2022, Fannie Mae launched the Positive Rent Payment Program, which offers free rent reporting to help tenants build their credit scores. 

“Using bill-reporting services can help someone start to build credit, using the bills they are already paying,” says Heidi Clemons, a financial coach at Managed Expectations. “Some landlords, property managers, and utility companies offer these services, often for a small monthly fee passed to the payer, to report your rent and utility payments to the credit bureau.”

Potential impact on your credit score

If you consistently pay your rent and utilities on time, reporting these payments to the credit bureaus can improve your credit score. “While this may build a positive history of making payments online, not all lenders will take this into consideration for their own lending decisions,” Clemons says.

Take out a personal loan

Another way to establish your credit history without a credit card is by taking out a personal loan, which is a type of installment loan. These loans can be used for a variety of purposes, like consolidating debt, paying off medical bills, or financing home improvements. There are two main types of personal loans you can pick from — secured and unsecured loans. 

Secured vs. unsecured personal loans

A secured personal loan is secured by some type of collateral, like money, property, or another asset. If you default on the loan, your lender can seize the collateral to settle the debt. Since these loans are less risky for your lender, you may qualify for better loan terms and higher loan amounts.

In comparison, unsecured personal loans don’t require collateral. The benefit is that you don’t have to put your assets at risk, but you may get higher interest rates and less favorable loan terms.

How personal loans can build credit

Personal loans contribute to your credit score in several ways. When you first apply for a personal loan, your lender will conduct a hard inquiry on your credit report. This will initially cause your score to drop by several points. However, your score will improve over time as you continue making on-time payments. 

Use a co-signer for a loan

If you have little to no credit history, many lenders will be hesitant to let you borrow money due to the unknown risks. That’s why Clemons suggests applying for a loan with a co-signer. 

“Using a co-signer to purchase a car or get a personal loan will help someone start building credit,” Clemons says. “Using a co-signer who has a great credit score and history can help get the borrower a loan and possibly a better interest rate.”

Benefits of having a co-signer

Applying for a loan with a creditworthy co-signer not only improves your odds of qualifying but could also help you secure better interest rates. You may also qualify for higher loan amounts and better repayment terms. 

Responsibilities and risks for both parties

The individual co-signing your loan has the most to lose in this situation. Their good credit benefits you, but if you default on the loan, it will cause serious damage to their credit score. Plus, co-signing a loan will increase their debt-to-income ratio (DTI), which could also lower their credit score. 

Finally, if you’re unable to repay the loan, your co-signer will be financially responsible for the unpaid balance. You should only ask someone to co-sign for you if you have a steady income and are confident you can repay the loan in full. 

Explore federal student loans

If you’re getting ready to go to college, taking out federal student loans is another way to build your credit score. Let’s look at how student loans can affect your credit score and how you can manage them responsibly. 

How federal student loans can establish credit

Making regular, on-time payments to your student loans will improve your payment history, which is the biggest factor affecting your FICO score. They also increase your length of credit history, which accounts for 15% of your FICO score. Student loans also expand the diversity of your credit mix, which accounts for 10% of your credit score. 

Managing student loans responsibly

There are many benefits to taking out federal loans — they come with lower interest rates and better borrower protections than private student loans. Plus, there’s no credit check required for federal student loans, with the exception of PLUS loans. 

Student loans are still a type of long-term debt, so you should only borrow what you need to pay for school. Take advantage of all federal loan options before considering private student loans, and try to make at least the interest payments while you’re still in school.