A credit score is a report that shows your lender how likely you’re to repay a loan on time. It’s typically scored between 300–850 (e.g. FIGO) g. or 0-999 (e.g. Experian). The higher the number, the better score you have!
The score is based on your credit history containing credit cards, total debt, repayment history, and other such factors. However, many people have the misconception that without a credit card, they can’t build a credit score – which is entirely false! So let’s explore how to build credit without a credit card.
How do I build credit without a credit card?
Building your credit score often becomes topical when you are looking to apply for a mortgage or other type of loan. The higher your score, the more likely you are to get approved and get a cheaper loan.
While credit cards can be useful money management tools, they aren’t your only option to build a credit history! Although they’re one of the easiest ways to evaluate your creditworthiness, here are seven other methods through which you can prove your credibility to a lender.
1. Debt repayment
Since a credit score is proof of your trustworthiness, it is essential to build that trust with something else if you don’t have a credit card. If you have a debt to pay, ensure that you pay it off on time with no outstanding dues. This leaves a good impression and boosts your credit score.
Whether it is medical debt, personal loan, or any other kind of loan, pay every bill on time before it reaches its due date. Timely payments earn you brownie points on your credit report. But your credit score takes a dip with missed or late payments.
If building your credit is the only aim you have in mind, starting with a mortgage is not the best idea because getting a mortgage without a credit history is difficult. But if you want to own a home with the possibility of building credit, there are options within mortgages.
There’s an option for first-time homebuyers with a small credit file. Smaller lenders can be more flexible and qualify you for a mortgage. Although a huge debt can hit your credit score, it will rise again with timely repayments.
Landlords don’t bother reporting your rent payment activity to credit agencies (unless you stop paying of course!). But showing your timely rent payment, or even other recurrent payments like utility, mobile and internet bills, boosts your credit. It demonstrates your financial consistency and is valid as proof of your creditworthiness.
You can ask your landlord or utility operator to report your payment pattern to your credit agency or contact the agency directly.
4. Authorised user
Fortunately, having no credit card doesn’t mean you can’t qualify to become an authorised user on an account. If you don’t have a credit card because you can’t qualify for one yet, consider becoming an authorised user on the account of a partner or family member. For example, if your partner has one but makes you its user, the card activity will be reported under your credit profile, and you’ll be responsible for repayments.
It doesn’t matter who uses the card; the owner has to take care of repayments. If you’re made the authorised user, you need to make timely payments to build good credit.
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5. Instalment loan
By the time you’re a young adult, you might already have one type of instalment loans like a student, car, personal loan, or mortgage. If you already have one of these loans, repay it on time. Don’t skip an instalment and avoid late payments. Keep these factors in mind to create a good credit score.
6. Credit builder loan
Similar to a personal loan, a credit builder loan allows you to make instalment loans with fixed monthly payments. But here’s the catch, unlike the normal loans where you’re granted cash, the lender instead deposits the cash in your savings account. You can access it once you repay the loan.
Timely repayments of this loan leave a good impression on your credit score. This is one way to build a good credit score.
7. Personal loan
Lenders offer unsecured personal loans to people with no or bad credit. You can even borrow a £1000 loan and develop credit by making on-time payments for the duration of the loan. This type of loan has higher APRs than a credit builder loan. However, there are platforms available where you can compare loans from multiple lenders and select the one that is suitable for you.
Secret to start building credit
Whatever the above methods you use to build your credit score without a credit card, the key lies in making timely payments. Late or missed payments damages your credit score. Hence, ensure that you’re always up to date on payments. If you’re bad at remembering due dates, set reminders or direct debits!
This article was written by Tanya Singh who works as a Content Marketer at LoanTube – a loan comparison marketplace where borrowers can connect with multiple lenders via a convenient and transparent application. She writes about topics related to personal finance and loans helping her readers in making smart decisions when they need to borrow.