Credit Cards

How To Build Credit Without Credit Card

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 9 minute read

The average Millennial is far warier about using credit cards than their parents were. Bankrate showed that just 33% of individuals under the age of 30 had any sort of credit card in 2016, while 55% of those between the ages of 30 and 49 and 62% of those over the age of 65 did. 

These younger consumers lean toward using debit cards, smartphone payment applications, and regular ol’ cash when making transactions.

Those of you who are among the more cautious Millennial generation have one thing going for you: you’re significantly less likely to get into over your heads with credit card debt than your parents’ generation was. 

There’s a major drawback, though it’s a lot more difficult to establish a credit history if you don’t use credit cards.

You may have problems getting a mortgage or a vehicle loan if your credit is not in good shape. No mortgage lender is going to provide you with the best conditions if they give you any at all. 

Even if buying a house isn’t on the cards just yet, solid credit history may help you land a job, secure a favorable apartment rental, and receive lower rates on things like car insurance.

How to Improve Credit Without a Credit Card

Financial articles aren’t very helpful for credit-wary Millennials. They often advise starting your credit history with a secured credit card or a student credit card. To avoid getting into debt, it’s better to avoid using credit cards altogether, therefore that advice isn’t particularly helpful.

Credit cards aren’t the only option for establishing credit, though. Not as easy as acquiring a credit card and paying it off each month, but useful for laying the groundwork for the excellent credit history you’ll need down the road.

1. Pay your additional debts

If you’re looking for a familiar saying, here it is: Paying your monthly bills on time, such as cable, phone, or utility payments, will help you build credit.

The thing you might not know is that it is not enough to merely pay these invoices month after month; you also need to take efforts to ensure that those payments are being recorded.

I, like many Millennials today, was wary of using credit cards while in college, but I was also eager to improve my credit score in anticipation of future credit card applications. 

So, I made sure to have the phone service in our dorm room suite put in my name and to always pay my share of the bill. However, I was shocked to be denied my first credit card application after finishing college due to my lack of credit history.

The monthly payments I make, such as my phone bill, are not automatically reported to the three main credit agencies, Experian, Equifax, and TransUnion. First, you must make direct contact with the service providers to seek payment reporting. 

Not all people will respond positively to this strategy since they are not obligated to do so. Strong payment history accounts for 35% of your overall credit score, so if they’re on board, it’s in your best interest to pay those payments on time every month.

2. Make use of an alternative credit provider

An alternative credit service, such as PRBC, can help you gain credit for payments even if your suppliers aren’t ready to do so. 

If you pay your rent, phone, utilities, insurance, and subscriptions on time, this free service will utilize that information to calculate an alternative credit score for you. A PRBC score above 750 demonstrates responsible financial behavior. 

Scores range from 100 to 850. A non-traditional credit history won’t benefit you as much as a standard credit score when applying for loans because most lenders only look at traditional credit reports. 

Yet, PRBC asserts that 8,500 lenders across the country make use of its scores. Financing a vehicle or other expensive items like furniture, jewelry, or electronics might benefit from a nonstandard credit report as well. 

To prove that you will be a reliable renter, many landlords will accept these scores instead of a regular credit score.

3. Inform Your Landlord

Rent payments are another way to establish creditworthiness. In most cases, rent payments are not reported to the three main credit bureaus; but, for a little charge, you may engage a rent-reporting service to ensure that your monthly payments are shown positively on your credit report. 

Alternatives might be:

  • Obtainable Karma for Rent. When you sign up for this service, it will call your landlord on a monthly basis to verify that you have paid your rent on time, and then report that information to TransUnion. It’s only accessible if your building’s property manager is licensed and responsible for at least fifty other apartments. Signing up with Rental Kharma will set you back $25, with monthly reporting fees of $6.95. For an additional $5, you may detail up to two years’ worth of rent payments.
  • RentTrack. The RentTrack platform acts as an intermediary. You may pay your rent online with RentTrack, and the service will forward your money to your landlord automatically. It notifies not just one, but all three major credit bureaus of the payment. No landlord registration is required; it’s open to everyone who rents. There is a discount for registered landlords that lowers the monthly cost to $6.95. Although RentTrack doesn’t now have a way to report prior payments, they want to in the near future.
  • PayYourRent. PayYourRent is a website where rent may be paid electronically. It’s cost-free, and it updates all three credit agencies on your rent payments. A paid landlord account is required for the usage of this service.

4. Repay your education debt

Federal student loans are one sort of loan for which a borrower often does not need to undergo a credit check. In the eyes of the three main credit bureaus, student loans are just another type of monthly loans like a car loan or a mortgage. 

This implies that if you are serious about building a good credit history, you should make your student loan payments on schedule every month.

Don’t worry if you need to delay making payments on your student loans; doing so won’t have a negative impact on your credit rating. It’s true that your credit won’t improve until you really start paying your payments, but the deferral won’t damage it, either.

But missing payments on student loans is an entirely different story. The effects of a default on one’s credit and financial situation are devastating. 

The inability to work will make it more challenging to repay the debts in the future. To put it another way, you should do all in your power to prevent yourself from doing it.

5. Get a credit-building loan.

Another option for getting a loan if you don’t have a good credit history is taking out a payday loan. A loan designed specifically for the purpose of establishing or improving credit is known by that name. 

Similar to a secured credit card, however with this form of loan from a firm like Self, you make monthly payments instead of placing money into an account upfront and borrowing against that account.

The bank doesn’t actually lend you any money when you apply for a credit-builder loan; it’s just a loan in name only. Instead, the borrowed funds are placed in a separate account for your use. But you can’t use this account until all the payments have been made. It’s like putting money aside to pay for something later.

It’s a bad bargain if the loan’s repayment is your only takeaway. Instead of paying interest to the bank every month, you could just put that money aside in a savings account and have the bank give you interest. 

A credit-builder loan has the extra benefit of reporting your on-time payments to the credit bureaus. If you borrow $100 for six months and pay it back on time, your credit score will increase by about 35 points, as reported by NerdWallet.

Banks may make a lot of money off these credit-builder loans, but not all of them provide them. A local credit union or bank is your best bet for obtaining one of these loans.

6. Accept the Invitation to Use Someone Else’s Card.

You may still benefit from learning about responsible credit card use even if you don’t have or desire a card of your own. A good way to establish credit is to piggyback on the payments of a friend or family member by asking them to add you as an authorized user on their card.

The credit card issued to you as an authorized user will be connected to the primary cardholder’s account. This card is yours to use as you choose, but you won’t be held fully liable for any charges incurred with its use. 

It goes without saying that you’ll be expected to reimburse the account’s primary use for any money you spend using their credit card.

If you need occasional access to a credit card but don’t meet the requirements to apply for one on your own, being an authorized user can help. Moreover, you need not be an adult to participate. To help their children establish credit histories, many parents add their children as additional cardholders on existing accounts.

Before adding another person as an authorized user, there are two things you should verify. To begin, you should verify that the card in issue indeed does record authorized user activity to the major credit bureaus. Without this feature, making purchases with the card won’t enhance your credit score in the slightest.

Secondly, check the borrower’s credit card usage history to ensure they are reliable cardholders. You want someone who has a good credit history, owns a credit card but rarely uses it, and pays their payment promptly. 

Thus, the primary user’s responsible credit behavior will positively reflect on you as well. Your credit score will take a hit if the primary cardholder consistently charges the maximum amount or makes late payments.

Develop a Good Credit Habit

You need to practice proper credit hygiene regardless of the approach you use. If you want to improve your financial situation, taking out a loan or using someone else’s credit card won’t be enough.

If you pay your payments on time, that will help your credit score the most. What this includes is everything you owe, such as rent, utilities, loans, and credit cards. Your credit will take a major hit if you allow any bill to get so late that a collection agency is involved.

How long you’ve had those accounts open matters, too. The longer you’ve maintained a positive payment history on a certain account, the better it will seem on your credit report. 

The longer a loan or credit card account has been open, the more it helps your credit score, so it makes sense to get one as soon as possible.

Additionally, if you’re going to add yourself as an authorized user to someone else’s card, it’s in your best interest to go with the card that they’ve had the longest.

As a final piece of advice, make it a habit to check your credit report frequently. Checking your credit report often will allow you to keep an eye out for any discrepancies that might be hurting your score. 

By visiting AnnualCreditReport.com, you are entitled to a free copy of your credit report from each of the three main credit agencies once each year. 

With these three free reports spread out throughout the year, you’ll never have to wait more than four months between checks, allowing you to swiftly identify and address any issues that may arise.

Bottom Line

Whether you use a credit card or not, it takes time to establish a positive credit history. It will take you at least six months of timely payments to establish a credit history that will inspire confidence in financial institutions.

A solid credit score takes time to establish, but the benefits are well worth the effort. Savings in interest payments for a mortgage or other loan may total thousands of dollars over the course of the loan’s term if the borrower had good credit. 

In addition to improving your chances of landing a job or renting a nice place to live, it may also help you save money on things like vehicle insurance and mobile phone subscriptions. What a great list of rewards for a hard effort.

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