7 Ways to Build Credit When You Don’t Use Credit Cards

Credit scores are a spicy topic these days. Paying rents higher than mortgage payments leads people to wonder whether credit scores are obsolete. They might be, but it’s not the 1950s. Banks don’t personally know their customers anymore, and they still need a way to judge how likely someone is to be able to repay their loans. Until someone comes up with a better system that we all embrace, credit scores aren’t going anywhere. So either come up with that system or build up your credit score.

Unfortunately, debit cards, prepaid cards, and cash don’t build credit because they don’t prove that you borrowed money and repaid it. They help you avoid debt (which is useful), but they don’t create the kind of payment history that credit scoring models use.

This is important to veterans because their credit can affect major financial goals when separating from the military, including buying a home. The VA doesn’t require a minimum credit score for a VA-backed home loan, but lenders may set their own credit score requirements. So while the VA may not care about a high number, the banker signing off on the money sure as hell does.

That being said, a credit card is a great way to start building your credit history, but it’s not the only way. It just happens to be the easiest. It’s also the easiest way to end up in a swirling black hole of debt that could take years to escape. 

How Credit Scores Work

A credit score (or FICO Score) is simply based on repayment information in your credit reports, and says things like “open,” “never late,” and “paid in full.” 

Okay, my credit report says that. Others may not be as fortunate. 

Lenders use these reports to estimate the likelihood that someone will repay borrowed money on time. Most scores range from 300 to 850 (you can have more than one credit score), and higher scores can make it easier to qualify for loans and secure better interest rates. The concept is simple. The execution is much more complex.

FICO stands for the ironically-named Fair Isaac Corporation, the data analytics company that created the system and the widely used credit scoring model. FICO Scores are calculated from five categories: payment history, amounts owed, length of credit history, new credit, and credit mix. Payment history is the largest category at 35%, while credit mix is 10%. While the type of credit (credit cards, student loans, etc.)  is part of the calculus, it isn’t necessary to have one of every type of credit account to build credit. And that’s the key takeaway: A credit card is just one type of credit account, not the only type. If you don’t want a credit card because you’re avoiding debt, rebuilding after a rough patch, or just don’t like them, you can still build a record of on-time payments through other reported accounts.

If you truly don’t want (or don’t trust yourself with) a credit card and still want to build a credit history in the hopes of one day purchasing a house, 

1. Use a Credit-Builder Loan

A credit-builder loan is the most direct way to build credit without using a credit card. With this type of loan, the lender places the loan amount into a locked savings account. You make small payments for a set period, often six to 24 months, and then receive the money at the end of the term.

Credit-builder loans are designed to create a reported payment history. These loans help people without a credit record establish one and improve scores for people with no current outstanding debt. Easy.

Before signing up, ask whether the lender reports payments to all three nationwide credit bureaus, what the fees are, what the interest rate is, and what happens if you miss a payment. Credit-building products won’t help if the lender doesn’t report payment activity, and defaulting on the loan will just make you look worse.

2. Passbook Loans 

A passbook loan is another secured loan option. It’s backed by money already in your savings account. But again: make sure the lender reports payments to credit bureaus. If it doesn’t, then there’s no point to this exercise. What happens in a passbook loan is that the bank lends you a portion of your savings. That sum is frozen in your savings account, slowly unfreezing as you make payments on the loan. The money in your account still accrues its regular interest rate, but can’t be withdrawn or used otherwise. As long as you make the regular payments on the loan, there’s very little risk involved. You’re basically just slowly paying back your savings account. The main difference from a credit-builder loan is that the money used as collateral is already yours. This can work for someone who has savings but a limited credit history. It doesn’t require a credit card, and it may come with a lower interest rate than an unsecured personal loan because the lender has collateral. 

3. Actually Pay Your Existing Loans 

I know it’s a shocking revelation: actually paying your bills increases your credit score. But listen, people go through rough patches where they might be forced to make late payments, juggle money, or even skip a payment in favor of making another payment. 

There’s nothing to be ashamed of; it happens to the best of us. But that payment history has to be repaired. 

If you already have an auto loan, student loan, mortgage, or personal loan that appears on your credit reports, the best move is simple: pay on time, every time. Payment history is the biggest factor in a FICO Score, and lenders want to know whether past accounts were paid as agreed.

Set up automatic payments if you’re confident the money will be in the account when the payment hits. Autopay can prevent missed due dates, but it doesn’t prevent overdrafts, returned payments, or budget problems. Remember, the credit benefit comes from actually making on-time payments, not from simply setting payments to autopay. If there’s no money in your account when an automatic payment hits, then you’re missing a payment and probably incurring an overdraft fee. The credit bureaus don’t know whether you used autopay; they just follow the money.

But most importantly, do not take out a new loan you don’t need just to build credit. New credit is a smaller factor in FICO scoring, but still significant, and opening several accounts in a short period can signal higher risk, especially for people without long credit histories. 

4. Rent Reporting

Rent payments can sometimes help build credit, but only when they’re reported and used by the scoring model or lender reviewing your file. The three major credit reporting agencies include rental payment and related debt-collection information in credit reports, though they handle it differently.

If you rent, ask your landlord or property manager whether they report positive rental payments. If they don’t, some rent-reporting services may be available, but you should check which credit bureaus they report to, what they charge, whether they report only positive payments, and how they handle late payments.

Rent reporting isn’t guaranteed to boost your score. Some rental data may appear in one report and not another, and some lenders may rely on scoring models that don’t weigh rental data the same way. Treat rent reporting as a firm maybe for credit-building. You just can’t rely on it.

5. Alternative Payment Data 

Some programs use alternative data—payment for things such as rent, mobile phone bills, utility payments, bank deposits, withdrawals, or transfers—to help assess creditworthiness..

The upside is obvious. These are the things you pay for every month anyway. You should get credit for them. Literally. Regular bills may show that you meet obligations even if you don’t use credit cards. The downside is also real: alternative data can be incomplete, inconsistent, incorrect, or biased, and not every lender uses it. Read the privacy terms before connecting bank accounts or giving a company access to payment data.

Experian is one of the three credit reporting agencies that control your financial future. It offers Experian Boost, a free tool that lets you add on-time payments for utilities, phone, internet, streaming services, and sometimes rent or insurance to your Experian credit file. Many users see an immediate increase in Experian/FICO scores, especially those with thin histories.

6. Become an Authorized User 

There is one card-related option that doesn’t require you to use a credit card yourself. A trusted person may be able to add you as an authorized user on an older account with a strong payment history. That account may then appear on your credit report and could improve your credit profile.

This should be handled carefully. If the primary cardholder misses payments or runs up a high balance, the account could hurt instead of help. Avoid paying strangers or companies to add you to someone else’s account, a practice often called piggybacking, because it can create risk and doesn’t build your own repayment habits.

7. Secured Credit Cards

Yeah, we know this is supposed to be an article about building credit without credit cards, but a secured card isn’t a regular card. The spending limit on a secured card is set by the amount you pay in deposits before using the card. You are still borrowing money every month; you’re just borrowing with your deposit as collateral. You pay the bill in full every month to avoid catching interest or late fees, and you get credit reported for the effort. Consider it an investment in your credit history. 

Check Your Credit Reports 

Before opening anything new, check your credit reports. Federal law gives you the right to a free credit report every 12 months from each of the three nationwide credit bureaus, and the bureaus have permanently extended free weekly online access. Checking your own credit report doesn’t hurt your credit score.

That website is AnnualCreditReport.com. It’s the only one. Any other site is trying to sell you something. Or scam you. You can check all three bureaus at once, or parse them out over the course of the year, based on your needs.

To get a sense of where you stand, however, it’s best to view all three reports. They may not contain the same information. Look for accounts you don’t recognize, incorrect late payments, wrong balances, duplicate collections, old addresses you’ve never used, or signs that someone opened credit in your name. Credit report errors are highly important to dispute because they can affect borrowing costs, housing, insurance, and, in some cases, employment (security clearance investigators always check your finances).

If you find an error, dispute it with the credit reporting company and the company that supplied the information. The dispute should explain what’s wrong, why it’s wrong, and include copies of supporting documents. If the information can’t be verified or is wrong, it must be corrected or removed.

But if you do anything (or everything) mentioned here, keep in mind that credit building is a slow process. The bureaus are looking for a demonstrated ability to pay over time. Growing a credit score will likely take a minimum of six months, but with diligence, it will grow.