Building Credit Without a Credit Card

Did you know that credit cards are the gold standard for building credit?

Credit bureaus and credit scoring models look at credit cards differently than they do for other types of loans, such as home mortgages and personal loans.

And, you may know that having a credit card helps you build credit (assuming you don’t rack up credit card debt, that is).

Still, there are a lot of reasons why you might consider building your credit without a credit card. For example, perhaps you’re not yet eligible for a credit card. On the other hand, maybe you don’t want the temptation of overspending to follow you around.

In any case, here’s food for thought: it is possible to build credit without a credit card. While this may not happen as quickly or as easily, it’s very possible to do.

We’ll walk you through all the ways you can still build your credit score without that pesky plastic card. Read on to learn more.

Ask to Be an Authorized User on a Trusted Friend or Family Member’s Credit Card

This isn’t something to consider lightly, but it can work out.

If you’re added on as an authorized user to someone else’s credit card, that credit card history appears on both of your credit reports. So, if your friend or family member is responsible with their personal finances, you’ll get a boost to your credit score.

On the flip-side, if you mess it up by not paying back charges on time or racking up debt on your newly-issued credit card, your friend or family member’s credit will take a hit as well as your own. For that reason, this can be a stressful (and relationship damaging) situation if you aren’t careful.

Pro tip: no one says you actually need to use the new card.

If you want to be safe or ease their mind, you can offer to hand the card over to that person for safe keeping. The credit information will stay on your account for as long as you’re an authorized user, regardless of whether you use the credit card or not.

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Apply for a Credit Builder Loan

You’re not the first person to wonder about building credit without a credit card. That’s why some banks and credit unions offer credit builder loans.

A credit builder loan is a small loan that a bank gives you specifically for building a credit score. Lenders understand that your credit score may not be sky-high, and these loans are relatively easy to qualify for.

When you get one of these loans, it’s important that you make all of your payments on time. If you miss a payment, this whole plan can backfire because any late payments will seriously affect your credit score!

If you want to be safe, try this: keep that loan money in a separate savings account that offers the highest interest rate you can find. Use that savings account to set up automatic payments to the loan.

This way, everything is set on autopilot and there won’t be any temptation to spend the excess cash in your account. There’s even the benefit of earning interest until you finish paying off the loan.

Apply for a Student Loan, Auto Loan, or Personal Loan

Your next option is to apply for some other type of loan. This could be a vehicle loan, any other type of auto financing, a personal loan, or even a student loan.

However, it’s worth noting that these loans could be much harder to qualify for since they have stricter requirements than a credit builder loan does.

Each lender sets their own bar in terms of credit requirements. Some lenders may be willing to lend you money at higher interest rates for smaller amounts. Other lenders, in turn, may not lend to you at all.

Tips for Applying for a Loan With Limited or Bad Credit

Getting a loan can be difficult if you’re still building credit, but it’s not impossible. Here are several tips you can use to boost your chances of loan approval:

Try a Credit Union First

Credit unions are known for being more likely to work with folks who want to improve their financial status. This is because credit unions are not-for-profit organizations. Banks, on the other hand, need to make a profit to please their shareholders.

Furthermore, credit unions sometimes offer higher interest rates on savings accounts and lower interest rates on loans. It’s best to shop around at credit unions in your area (or online) to see if you may be eligible for a loan before walking into a bank.

Talk to Lenders Before Applying

Before you go to apply for a loan, try and chat with a loan representative. Explain what you’re trying to do — get a loan for building credit.

Tell the representative that you may not have the highest credit score, but you’re looking to change that with this loan. Ask whether a personal loan is a good fit for you before you apply for it. If you find out that you likely won’t get approved for the loan, move on to another lender.

The main reason you should check if the lender will approve you ahead of time is so that you can limit the number of credit checks on your credit report.

Whenever you apply for a loan, lenders do a hard credit check. Each time a lender does a hard credit check, your credit score will lower by a few points.

If you apply for several loans in a row and are denied, your credit score could take quite a hit. But if you were to apply for a personal loan in Canada and, on your first shot, you got approval, you won’t need to worry about a whole slew of credit checks appearing on your credit report.

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Note: regardless of whether the lender approves you or not, those credit checks won’t affect your credit score after a year.

So, even though your credit score may take a temporary hit, it may be worth applying for a personal or car loan as long as you can make payments on time.

Apply at an Alternative Online Lender

If you’re unable to get loan approval with a bank or a credit union, another option is to apply with an alternative online lender. Many online lenders are willing to work with people who are still trying to build their credit.

Alternative online lenders may charge you a higher interest rate for a loan if you don’t have top-notch credit. But, so will banks and credit unions if you’re lucky enough to actually get a loan.

But even if you take out a short-term loan at a higher interest rate, you’ll still save a ton of money down the road when you need to apply for a larger loan – like a mortgage – if you’re able to build up your credit now.

Searching for the best rates on personal loans in Canada? LendingArch works with a wide network of lenders, and we can help find the perfect online lender for you.

Apply With a Co-Signer

If you can’t get approved for a loan on your own, you may try applying with a co-signer. A co-signer is someone who agrees to be responsible for the loan if you default and can’t pay.

It’s another serious commitment to ask of someone (just like being an authorized user). Therefore, you’ll want to make sure that you’re truly ready to commit to paying off the loan before you ask someone to be a co-signer.

When you apply with a co-signer, the lender will look at their credit report too. If that person has good credit, your chances of getting approval for a loan will increase and this loan will then appear on both of your credit reports.

Put Up Collateral

Collateral is just a fancy word for some property — such as a car, a bank account, or something else of value — that you pledge to a lender. If you default on the loan, the lender can legally take your collateral back in lieu of payment.

These types of loans are also called “secured loans” because they’re “secured” with collateral.

A car loan is a common example of a secured loan. In this case, the car is collateral and if you don’t make your payments, the lender can repossess your car.

Pledging some sort of collateral may improve your chances of a lender approving your loan. This is because if you default, the lender is guaranteed to get something rather than risk losing the money.

Bottom Line

Sometimes building credit seems like a catch-22 situation. You need to build credit to apply for credit but to build credit, you first need to get credit. It’s enough to drive you batty.

Lucky for you, if you follow these tips and stay persistent, you’ll start building credit — no credit card required.

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