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How to build credit without a credit card

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In many cases, credit cards offer the quickest path to improved financial standing, but what if your current score isn’t high enough to qualify for a card?

Having less-than-ideal credit happens. In fact, just over 40 percent of Americans have a FICO credit score under 700. Here’s Bankrate’s guide to building credit without a credit card and getting your score back on track.

8 ways to build credit without a credit card

When it comes to building up your credit score, cards aren’t your only option. Although credit reporting agencies often use credit card purchases and payments to evaluate your creditworthiness, this approach isn’t exclusive to cards.

If you’re making payments on time and keeping your debt-to-credit ratio low (below 30 percent, ideally), you can build up enough credit to qualify for the card you want.

Get a credit builder loan

If your credit report is “thin” or your credit score is bad, you may have a hard time getting approved for a traditional loan. That is where a credit builder loan comes into play.

When you apply for a credit builder loan, lenders place the full amount — typically between $300 and $1,000 — into a secure account. Unlike a regular loan, you can’t access the money right away. Instead, you make a fixed payment every month until you’ve paid off the entire loan and then receive the loan proceeds (minus applicable fees) at the end of the loan term.

Credit builder loans offer a great way to build credit because you’re making regular payments but aren’t spending extra money. All payments are reported to the major credit bureaus to help boost your credit rating.

Apply for a personal loan

Personal loans offer another opportunity to build credit without opening a credit card by simply making payments on time and paying back the loan in full as soon as possible. While these loans typically have higher APRs than credit builder loans (especially if you have a limited credit history or previously defaulted on loans), they can help establish a solid credit starting point.

However, before you commit to taking out a personal loan, make sure you are in the position to repay your loan. Your credit score will take a hit if you can’t make the payments per the terms of your loan.

Consider a car loan

Car loans count toward good credit when you make on-time payments. You won’t reap this benefit if you pay cash, so if you need a car and want to build credit, look for a low-to-medium APR with monthly payments you can afford.

Like a credit builder loan, car loans are installment accounts that get reported to the credit bureaus and ultimately show up on your credit report. It is important to consistently make on-time payments so you can positively impact your credit score.

Repay an existing loan

Repaying existing loans — such as student loans — can improve your credit rating if you pay on time and don’t default on the loan. If you are already working on paying off your student loans, for example, you are positively impacting your credit score as long as you make payments in concurrence with the terms of your loan.

Report alternate payments

Many creditors now recognize that student loans, auto loans and personal loans are just the tip of the credit iceberg. As a result, they’re often willing to consider alternative payment data to help build your credit score.

Apply for a secured credit card

Secured credit cards have lower approval thresholds than their unsecured counterparts because cardholders need to supply a cash deposit in advance. The amount of this deposit typically equals your available credit — meaning that a $200 deposit gets you $200 in credit, $500 gets you $500 and so on. Secured cards function similarly to a debit card, but instead of a checking account, you are relying on your cash deposit.

When you apply for a secured credit card, double-check that the issuing company reports information about your account to the three credit bureaus. If they don’t, your credit history will not reflect any progress made with your secured credit card. Once you prove your creditworthiness with consistent on-time payments, your issuer may upgrade you to an unsecured credit card automatically, or you can ask your credit card issuer to upgrade your account.

Become an authorized user

Many credit companies allow cardholders to add authorized users. As an authorized user, you receive a physical card and access to the main cardholder’s line of credit — all without a credit check. This lets you make purchases and have overall card activity reported to credit bureaus without requiring you to apply for a card on your own. It’s worth noting, however, if the main cardholder fails to make payments or spends above the credit limit, your credit will also be impacted.

Rent and utility payments

While most landlords don’t report your monthly rent payment to credit agencies, this consistent payment structure can help demonstrate a pattern of financial consistency. Rent payments are one of the most consistent recurring payments consumers face every month, and your credit score could get a boost if you always pay your rent or other utility bills on time.

Other recurring payments, such as cable, internet and mobile phone contracts, can also help boost your credit. Ask your landlord and telecommunication provider to report your data to Experian RentBureau or look into services like Experian Boost, which track your phone and utility payments every month.

Other considerations

It’s also worth noting that no matter how you choose to build credit — such as by getting a personal loan, a secured card or becoming an authorized user — your success depends on three key factors:

Make payments on time

Ensuring your payments are always on-time is the best way to boost your credit. Since your payment history makes up 35 percent of your credit score, it is crucial to pay your bills on time. Not only do you avoid any cash penalties or APR increases, but you show the pattern of financial consistency that credit agencies want to see.

Manage your debt-to-credit ratio

Your credit utilization is the ratio of your total credit to your total debt, and it is generally a good idea to keep your credit utilization below 30 percent. The higher this ratio, the slower you’ll build credit. For example, if you have a secured card with a $1,000 limit and a $300 balance, your debt-to-credit ratio is 30 percent. Less than 10 percent is ideal and more than 50 percent makes it difficult to establish a good credit score.

Maximize your credit history

Lenders rely on your credit history as a glimpse into what kind of borrower you are. It functions a lot like a report card. The longer your history of making payments on time and keeping your debt under control, the better your credit score. If you’re just starting to build credit or are recovering from recent financial difficulties, however, your history is often limited. Help jump-start your credit score by reporting as much data as possible — from rent and student loan payments to vehicle and personal loan details.

The bottom line

By making on-time payments, keeping an eye on your debt-to-credit ratio and considering options such as taking out a credit-builder or personal loan, reporting alternative credit data or applying for a secured credit option, you can get your credit rating back on track.