Credit cards are useful tools for earning rewards, enjoying warranty and protection benefits, and building your credit. However, if you’re credit card averse for any reason, you can still build a decent credit history. Here’s what you need to know about building your credit without credit cards and information on a card you might prefer to a standard credit card.
What’s in a credit score?
To build a positive credit history, first you must first know what goes into your credit score. The most widely used score by lenders is the FICO score, which is calculated using five factors:
Payment history (35%): Make all of your payments on time, 100% of the time.
Credit utilization (30%): Keep ratio of debt balance to credit limit below 30%.
Length of credit history (15%): The longer the average credit account has been open and active, the better.
Types of credit in use (10%): A mix of different types of credit accounts is better than one type of credit account.
New credit (10%): Each new credit application imposes a “new credit penalty” on your score.
This information is pulled off of your credit report, so if anything is amiss on your report, your score will also be wrong. As a reminder from your friendly neighborhood Nerd: Pull your credit report from each of the three credit agencies each year for free by going to AnnualCreditReport.com. If there are any discrepancies, dispute them using these five steps.
How can I build credit without credit cards?
In order to build credit, you have to take on some type of debt. With a credit card, you can use credit while avoiding interest by paying it off in full each month. Here are a few other credit types you could use that may or may not cost you in interest:
Student loans: Federal subsidized government loans cost interest, but not until after you’ve finished school. Your student loan payments won’t be due (or accrue interest) until six months after you stop attending classes. If you pay off these debts before the grace period ends, you’ll enjoy no interest and establish payment history. For unsubsidized or private loans, you’ll have to pay interest.
Car and personal loans: The majority of loans will cost you interest, even with on-time payments. The interest rates are significantly lower than credit card rates, but they will cost you at least a little in interest over the life of the loan.
Mortgages: You probably won’t be able to procure a mortgage without previous credit history, but having one is a good way to show responsible payment behavior.
Personal line of credit: A personal line of credit is a revolving amount issued by a bank. Credit cards are often called lines of credit, but there are many other forms. This will give you a similar credit effect to having a credit card.
HELOC (home equity line of credit): A HELOC is a loan taken out using your home as collateral. Like a line of credit or credit card, it’s a revolving credit account.
So it’s clear that there are other forms of credit available. Of course, credit cards are generally the easiest to get approved for and use to build credit. If you’re afraid of having too much available credit on a credit card, there may be a better option.
A secured credit card is backed by a cash deposit usually equal to the credit card limit. The bank doesn’t incur risk because it has the money if you fail to make payments. And you can choose to put down a small amount to keep your credit limit low to avoid overspending. However, you need to make sure your issuer reports your secured credit card activity to the credit agencies. Otherwise, it isn’t an effective tool.
Bottom line: If you truly hate credit cards, despite their many benefits, there are other ways to build credit. Use other types of credit — preferably at least one that’s revolving — to prove your creditworthiness. And if you’re willing to try a cash-backed credit card, a secured card is a great option that’s easy to get approved for.
Climbing credit score ladder image via Shutterstock
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