Building Credit Without Credit Cards

Eventually, the need for credit is inevitable for most of us. When the time comes to buy a car or a home, rent an apartment, set up new utility accounts, obtain a cell phone or perform one of many other everyday financial transactions, a healthy credit history is the tool with which we can avoid expensive terms, or worse, application rejection.

Luckily, only a small portion of your credit score is based on having and using revolving credit products (credit cards). Your FICO score is based on the following:

• Payment history: 35%
• Credit utilization (amount owed vs. total available credit): 30%
• Account age/length of credit history: 15%
• New accounts/hard inquiries: 10%
• Credit mix/type of credit used: 10%

The VantageScore, another consumer credit rating system, uses similar criteria, in a slightly different formula developed by three credit reporting agencies (Equifax, Experian and TransUnion).

Clearly, the most important factors are establishing a history of on-time payments to all creditors and keeping debt low in relation to the amount of credit available to you (known as the credit utilization ratio). Consumers who can't – or don't want to – obtain a credit card can build credit in other ways.

That old student loan may feel like an albatross around the neck, but years of on-time payments and the age of the account will boost your score. An account in good standing factors into your score until 10 years after it's paid off and closed, so don’t miss payments or pay late.

Pay off collection accounts, too, since the newest version of the FICO score ignores paid collections (but seriously dings your score for unpaid collections).

For consumers with subprime or unscorable credit, reporting rental payments is a very smart move. An Experian study found that for consumers with “thin” credit files (not enough data upon which to base a score), adding rental history made them scoreable. Many jumped straight to the prime credit category. Furthermore, consumers who already had credit scores saw their scores rise by an average of 29 points.

Here’s why: A large portion of the consumer credit score is based on payment history and account age. Consumers who regularly make on-time mortgage payments score both types of points. But in this context, consumers who rent responsibly have historically been at a disadvantage. While evictions and collections can do plenty of damage until recently a responsible rental history provided little or no credit benefit.

Times have changed. All of the major credit reporting agencies now include rent payments (when reported) in the consumer credit file. Rental payment history is not factored into FICO scores, but may be included in a specialty credit report provided to landlords. Rental history is included in the VantageScore, and, in fact, can boost the consumer’s credit score within one month.

Consumers can’t report their own rent. The property manager or landlord can report directly to the credit agency, or the tenant can sign up with a third-party rent reporter. These companies include Rental Kharma and RentReporters – also ClearNow, RentTrack and PayYourRent, three rent reporters that collaborate with Experian RentBureau.

One good way to prove that you're a good credit bet is by borrowing money and paying it back on time. Most loans are reported as installment accounts, and the credit reporting agencies want to see that you can handle one responsibly. (Strangely, motorcycle and scooter loans are often reported as revolving credit even though they function as installment loans. That could hurt you because, initially, the credit utilization ratio will be very high.)

Go to your bank and ask about a small personal loan. If you don’t qualify for a traditional unsecured loan, you might qualify for a loan secured with collateral, such as funds in a Certificate of Deposit account that you cannot withdraw while the loan is outstanding.

If banks are not an option, many peer-to-peer lenders such as Prosper and Lending Club report to the credit bureaus, and they have higher approval rates than banks.

Many stores offer credit accounts. Most are reported as revolving credit, the same as a credit card. Home Depot offers project loans. Many local home improvement stores also offer credit accounts, and some are available with the payment of a deposit in lieu of good credit. Staples office supply store has several credit products, including a personal credit account administered by Citibank. Before applying for store credit, be sure the vendor reports to the credit bureaus. 

Also, keep in mind that some credit cards are better than others for people with poor credit scores, while others can help individuals recover from poor credit.

The majority of utility providers only report derogatory information to the credit bureaus, but if you live in Detroit and you pay your bills on time, you’re in luck. DTE Energy reports all payment histories, both positive and negative. Customers who pay their bills on time benefit from responsible management of this household expense.

Not in Detroit? Contact your utility provider to find out if it reports to the credit bureaus, and if so, put the bill in your name. If not, you can still use the positive payment history to your advantage. Most utility providers are happy to provide a letter of reference for an account holder in good standing.

Employment doesn't factor into your credit score, but it does show up in your credit file. Some creditors (mortgage lenders, for instance) need to see a stable employment history before they’ll approve an application for credit.

Healthy credit comes from the responsible use of credit products. You can’t avoid credit entirely if your goal is to build a solid credit history and credit score (which are not the same thing). For that reason, consumers who want to build credit may find it necessary to eventually obtain a credit card. A secured credit card will work until the consumer can qualify for a traditional card (again, be sure it reports to the credit bureaus). Remember, credit cards can help boost your score, but credit card debt is never required in order to build credit. As always, keep an eye on your credit report for inaccuracies and be sure to avail yourself of free credit score services to see where you stand with the credit bureaus.