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Having solid credit is key if you ever need to borrow money, apply for an apartment or finance a car. Responsible use of a credit card is one surefire way to build credit, but what if you're just starting out and can't yet qualify for one?
Fortunately, there are plenty of other ways to build credit without a credit card, such as becoming an authorized user on someone else's card or getting a credit-builder loan that's specifically tailored to improve your credit.
If you need help establishing credit, here are some reliable ways to do it without having a credit card in your wallet.
Ways to Build Credit Without a Credit Card
Before you make strides to improve your credit, first take a moment to check your credit report, which you can do for free through Experian. This will let you know where you stand, which not only makes it easy to track your progress, but will help inform what options will (or won't) be available to you. Ready to get started? Let's go.
1. Pay Your Bills on Time
Do you have a student loan or an auto loan? Or maybe some medical debt or a personal loan? Now is the time to be zealous about paying every bill you have by the due date. Each payment on an installment loan is reported on your credit report. While on-time payments can give your score a nudge in the right direction, late or missed payments can cause it to nosedive. If you tend to make late payments due to forgetfulness, set up reminders on your calendar or schedule automatic payments with your lender or creditor.
2. Become an Authorized User
If you don't have a credit card because you can't qualify for one yet, consider becoming an authorized user on the account of a loved one. You get a card and can make charges on the account, but the owner is ultimately responsible for the account and repayment. The card's activity will likely be reported on your credit profile in addition to theirs, so if the account is used responsibly by both of you, it can help build your credit.
Before you do this, it's important to remember the risks. If you use the card irresponsibly, you could tank that person's credit, as well as your own, and jeopardize a relationship. If they make mistakes like missing payments, it can hurt your credit.
So only go with this option if you trust the person and are sure you can use the account wisely. If there's not anyone you could do this with, consider getting a secured credit card, which is meant for those who need help building credit and requires a deposit to get started.
3. Get a Credit-Builder Loan
If your credit report is "thin" (meaning you have few credit accounts) or credit score is bad, it might be impossible to qualify for a traditional installment loan. But some banks and credit unions offer credit-builder loans, which are unique financial accounts intended to help you establish positive credit history.
These aren't traditional loans. Instead, a bank or credit union puts a set amount of money into a special savings account—usually $300 to $1,000, according to the Consumer Financial Protection Bureau. You will pay this amount back, in usually six to 24 months, and you can't access the funds until the amount is paid off. These payments are reported to the credit bureaus, which helps you establish credit, and once the loan is fully paid, you get all of the money back. Just be sure to make your payments on time to get the maximum benefit to your credit.
4. Try Experian Boost®ø
While utility companies often check your credit when you first create an account, your monthly payments don't typically go on your credit report. This can be frustrating if you're diligent about paying your phone or electricity bill every month. But not anymore: Experian Boost offers a new way to make those payments count toward building your credit.
When you sign up for Experian Boost, your phone and utility payments will be factored into your credit report. If you have a track record of on-time payments for these bills, you might receive an instant boost to your existing credit score.
How to Build Credit Responsibly
As you begin your quest to build credit and eventually qualify for a credit card, make sure you're following these best practices to keep your credit on the right track.
- Continue paying every bill on time. Whether it's a medical bill, credit card payment or student loan, ensure every payment is on time. Late or missed payments will hurt your credit, so do what you can to make sure you submit payments by their due dates.
- Don't overdo it with new accounts. Once your credit improves, you may be eager to apply for credit cards with perks. But don't go too crazy; every application puts a hard inquiry on your credit report, and too many of these can have a negative effect. Don't apply for new accounts just because you can.
- Keep your credit utilization ratio low. It's important you don't use all of the credit available to you. If you have credit cards, this means not using more than 30% of your credit limit at any given time—credit experts say a utilization rate that's any higher will hurt your credit score. In other words, keep your balances as low as possible, and don't max out a credit card; it makes you look overleveraged to lenders and can hurt your credit score.
- Hold on to accounts in good standing. As you build credit, keep in mind that longevity of accounts is a factor in your credit score. The longer an account is on your credit report, the more it helps you. If you have an unused credit card, consider keeping it open since it helps keep your credit utilization ratio lower and helps show longevity. It's worth noting, however, that an account closed in good standing will stay on your credit for 10 years. So if an account isn't worth the fees associated with it, feel free to close it without worrying too much about how it may affect your credit.
Keep Track of Your Credit
To make sure your hard work is paying off, periodically check your credit score and monitor your improvement. As your credit report builds and your score begins to rise, it will become easier to get approved for credit cards, loans and other financial products. It will also help you in situations where your credit may be checked, such as when you're signing up for new utilities, applying for a job or applying to rent a home or apartment.