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It is not true that you need a credit card to build your credit.
If you’ve read anything about personal credit, you “know” that it takes credit to get credit. What that means is: Start with a credit card, any card, even if it’s secured, charge expenses, pay them off before the due date to avoid accruing any interest, and repeat. With time, you’ll build a credit score and credit history worthy of platinum credit cards and more.
But what if you don’t want a credit card? Some people (rightfully) fear that they won’t know how to manage their credit. Others just don’t want the hassle.
But some day, at some point in your life, you may want to buy a house, get a brand new car, or do something else that, unless you are in the category of the uber-rich, requires good credit to get a good deal. Can you really build your credit without ever having a credit card?
The answer is: Yes, but it’s not easy.
Building a Solid FICO Score Without a Credit Card
On-time payments make up more than 35 % of your credit rating, which is why having and using credit cards are an effective way to build your credit. But personal loans, car payments, mortgages and even some rent and utilities payments also count toward the on-time payment portion of your credit score.
To build a FICO score without a credit card, build up a diversity of other credit, such as car payments and personal loans. Let’s look at five specific ways you can build your credit.
1. Car loan – Many used car dealers will give you a loan if you have a small down payment and can show a steady income of a certain amount (sometimes as low as $300/week). You won’t get the best interest rates, but you will build your credit. When you pay “more than the minimum,” this shows up on your credit report, so if you can toss an extra few dollars toward your car payment each month, you’ll save on interest and also build your credit profile.
2. Rent payments – If you’ve been paying rent, ask your landlord if he can report your on-time payments to the three credit card bureaus. (Landlords now report late payments to the credit bureaus but are not obligated to report on-time payments.)
3. Utilities – Some utilities may also show up on your credit report, affecting your credit scores. Therefore, it’s good to ask before you buy a new cell phone if your payments are reported, and select a provider that does report on-time payments.
4. Student loans – On-time payments of student loans are reported to the credit bureaus, so these can help build your credit, too.
5. Become an authorized user on someone else’s account. – You may be able to improve your credit score by becoming an authorized user on someone else’s credit card in good standing. Be careful with this one. Any late payments made by the credit card holder could also count against your credit score. In the 2000s, FICO had temporarily changed this practice, but it’s back in effect — except that not every credit card follows the practice, so being an authorized user may not help you, or hurt you, at all. Call the customer service department of the credit card before the cardholder adds you as an authorized user, and ask if they report on-time and late payments to the credit reporting agencies (and if they remove the card from your credit report if you are removed from the account).
6. Mortgage – Prior to the mortgage crisis, you could secure a “no credit check” mortgage with a 25% down payment with most lenders. These type of mortgages do still exist, but are harder to find and may require as much as 30% down.
Since one of the reasons you may want to build your credit score is to qualify for a conventional loan with a low down payment and low interest rate, obtaining a mortgage is probably not the best way to build your credit. If you are looking for a mortgage and have no credit history, contact the FHA or ask a real estate agent to point you in the right direction.
Editor’s Note: Fannie Mae has introduced new rules making it easier to borrowers with thin credit files (i.e., not a lot of credit history) to receive a mortgage. The new underwriting rules take into account your payment history with other bills as well. What a novel idea! Anyway, you can learn more about these new rules here.
How Not to Build Your Credit
The FICO Expansion score looks at a number of other factors to assign you a number, similar to a credit score, that helps potential lenders gauge your creditworthiness. The FICO Expansion score takes factors like layaway plans, checking accounts, and property into consideration. However, very few lenders use this score to evaluate your creditworthiness, so it’s not an effective way to build your credit.
After you start rebuilding your credit, be sure to read our guide on how to check and monitor your credit score for free.