How to build credit without a credit card

Building credit is critical for financial health and stability, playing a pivotal role in various aspects of life. A strong credit history opens doors to essential financial opportunities, including securing loans for major purchases like a home or a car, obtaining favourable interest rates, and even qualifying for rental agreements or employment opportunities. It's not just about having access to credit but accessing the best possible terms and options and investing in your future financial well-being.

Beyond immediate financial benefits, a strong credit profile can also contribute to long-term financial goals and aspirations. Whether you're buying a home, starting a business, or pursuing higher education, having good credit can facilitate these endeavours by providing access to necessary funding and resources. By diligently building and maintaining your credit, you are laying the groundwork for a more secure and prosperous financial future, enabling you to achieve your dreams and aspirations confidently.

One common way for individuals to build credit is with a credit card. Timely payments and low credit utilization reflect strong credit management, strengthening your credit report and increasing your credit score. But what happens if you don't have a credit card? We explore ways to build credit and provide tips to kickstart your credit-building journey.

10 ways to build credit without a credit card

Get a credit builder loan

Credit builder loans are a financial tool designed to help individuals establish or improve their credit history. Unlike traditional loans, where you receive the borrowed funds upfront, the credit builder loan funds are typically held by the lender in a savings account or certificate of deposit (CD). This unique arrangement allows you to build credit while saving money, making it a valuable option for those who may not qualify for other types of loans due to limited credit history or poor credit scores.

One of the fundamental ways a credit builder loan builds credit is through structured payments. Borrowers make fixed monthly payments for the credit builder loans over a predetermined period, typically six months to two years. These payments are designed to be affordable and manageable, ensuring that borrowers consistently meet their obligations. Each on-time payment demonstrates responsible credit behaviour and contributes positively to the borrower's credit history.

Every month, the lender reports the borrower's payment activity to credit reporting agencies. As borrowers make timely payments, they gradually establish a positive payment history, one of the most critical factors in determining credit scores. By the time the loan is fully repaid, borrowers have demonstrated their ability to manage credit responsibly and likely seen an improvement in their credit scores.

Use rent reporting services

Rent reporting services offer an innovative approach for individuals to build credit by leveraging their regular rent and utility payments. Traditionally, rent payments are not factored into credit scores, but rent reporting services can include rental payment history in credit reports. By opting into these services, tenants can proactively contribute to their credit profile without a credit card or traditional loan.

You can sign up for rent reporting services and grant permission for them to access rental payment data from your landlord or property management company. Once enrolled, the service verifies your rent payments and reports them to the major credit bureaus regularly. Each timely rental payment is reflected in your credit report, helping build a good credit score. For individuals with limited or no credit history, rent reporting services offer an excellent opportunity to establish a positive credit profile.

Get a secured loan

Secured loans are instrumental in building credit for individuals with limited credit history or working to improve their credit scores. Like a secured credit card, a secured loan requires collateral to secure the loan amount. The collateral can be a savings account deposit, a certificate of deposit (CD), or a valuable asset such as a vehicle or property. By providing collateral, borrowers mitigate the risk for lenders, making secured loans more accessible to individuals with less-than-ideal credit profiles.

Once approved, the borrower receives the loan funds and makes regular payments according to the loan terms. These payments typically include principal and interest and are spread out over a fixed period, allowing borrowers to budget and manage their loans effectively. Paying off the loan impacts your credit positively.

Apply for a car loan

Applying for a car loan can be an effective strategy for building credit, especially for individuals new to credit or looking to improve their credit scores. When you apply for a car loan, the lender assesses your creditworthiness based on various factors, including your credit history, income, and debt-to-income ratio. While having a strong credit history can increase your chances of approval and secure favourable loan terms, many lenders offer car loans to individuals with low credit scores.

Making timely payments on your car loan is crucial, as payment history is one of the most significant factors impacting your credit score. Each on-time payment demonstrates your ability to manage credit responsibly and adds positive data to your credit report. Over time, this consistent payment behaviour can significantly improve your credit score, making you more attractive to lenders and creditors in the future.

Pay off your student loans

Whether you have federal student loans, provincial loans, or private funding, paying off your student loans can positively impact your credit score and overall creditworthiness. Student loans are considered instalment loans, meaning they involve borrowing a fixed amount of money and repaying it over time with regular, scheduled payments. As with any credit, your payment history influences your credit score.

Paying off your student loans in full can improve your credit utilization ratio, another important factor in credit scoring. Credit utilization ratio refers to the amount of credit you are currently using compared to the total amount of credit available. By eliminating your student loan debt, you decrease your overall debt burden, lowering your credit utilization ratio and potentially increasing your credit score. A lower credit utilization ratio indicates to lenders that you are not overly reliant on credit and are managing your debts responsibly.

Use peer-to-peer lending

Peer-to-peer lending is a valuable tool to build your credit while providing access to much-needed funds. Individuals borrow money directly from other people or investors through online platforms, bypassing traditional financial institutions. When you borrow through these platforms, your repayment behaviour is often reported to credit bureaus, allowing you to build a credit history like traditional loans.

Get credit union loans

Obtaining loans from credit unions can be a strategic approach to building credit without a credit card while accessing affordable financing options. Credit unions are member-owned financial institutions that typically offer loans with competitive interest rates and favourable terms. When you apply for a loan from a credit union, your creditworthiness is evaluated based on various factors, including your credit history, income, and existing debt obligations. While credit unions may have slightly different underwriting criteria than traditional banks, successfully obtaining a loan from a credit union can contribute positively to your credit profile.

Become an authorized user on someone's credit card

Becoming an authorized user on someone else's credit card can be an effective strategy for building credit, particularly for individuals with limited or no credit history. When you are added as an authorized user to someone else's credit card account, you gain access to the credit card's account history and credit limit. While you are not responsible for making payments on the account, the primary cardholder's payment behaviour and credit utilization will be reflected on your credit report.

Apply for a personal loan

You can build credit with a personal loan by borrowing a fixed amount and repaying it in regular monthly payments over a predetermined period. Successfully obtaining a personal loan demonstrates to lenders that you can manage debt responsibly, which can positively impact your creditworthiness. Consistent on-time payments are reported to major credit bureaus, improving your credit score.

Taking out a personal loan can also help diversify your credit mix, another factor considered in credit scoring models. Credit mix refers to different types of credit accounts, such as credit cards, instalment loans, and mortgages. A diverse credit mix can be viewed favourably by credit scoring models, as it demonstrates your ability to manage various types of credit responsibly.

Use debit cards that build credit

Using debit cards to build credit can help individuals improve their credit score without a credit card. When you use a debit card that builds credit, your payment history is tracked and reported to major credit bureaus. Responsible use of these debit cards, including making timely payments, can positively impact your credit score over time.

Unlike traditional credit cards, which require a credit check and may be inaccessible to individuals with limited or poor credit history, debit cards that build credit typically have more lenient approval requirements. It makes them accessible to a broader range of consumers, including those working to establish credit for the first time or rebuild their credit after experiencing financial challenges.

Using debit cards that build credit can help individuals develop responsible financial habits and budgeting skills. Since these cards are linked to credit-building programs, users are incentivized to make regular payments and manage their spending wisely to improve their credit scores. By tracking their payment activity and monitoring their credit score, users can gain valuable insights into their financial behaviour and make informed decisions to achieve their credit goals.

How long does it take to build credit?

The time it takes to build credit can vary depending on several factors, including your starting point, credit habits, and the credit scoring model used by lenders, like credit card companies. Generally, it takes at least six months of credit activity to establish a credit score, but building a strong credit history typically requires several years of responsible credit management. Building credit may take longer for individuals with limited or no credit history as they establish a track record of responsible borrowing and repayment.

Factors such as the types of credit accounts you have, the length of your credit history, and your payment history all influence how quickly you can build credit. For example, having a mix of credit accounts, including instalment loans and revolving credit accounts, can help diversify your credit profile and improve your credit score.

Tips to improve your credit score

The average credit score in Canada is 680, but working towards a higher score is always a good idea. Whether you want to build your credit score after bankruptcy or qualify for better interest rates and loan terms, here are tips to improve your score.

Check your credit report regularly

Request a copy of your credit report from each of the three credit bureaus, use credit score apps, or get a free credit score from your credit card issuer. Review your reports for errors or inaccuracies that could harm your credit report. Dispute any errors you find to have them corrected. Understanding your credit report keeps you alert to suspicious activity and on the right track to establishing credit.

Pay your bills on time

Payment history is one of the most critical factors in how credit scores are calculated. Make sure to pay all your bills, including credit card bills, loans, and utility bills, on time every month. Consider setting up automatic payments or reminders to ensure you never miss a due date.

Reduce your credit card balances

High credit card balances relative to your credit limits can negatively impact your credit score. Aim to keep your credit card balances low and avoid maxing out your cards. Paying down existing credit card debt can help improve your credit utilization ratio and boost your score.

Limit new credit applications

Credit card issuers and other lenders apply a hard inquiry to your credit report each time you apply for new credit, which can temporarily lower your credit score. Be selective about applying for new credit and only apply for accounts you genuinely need.

Diversify your credit mix

Having a mix of different types of credit accounts, such as credit cards, personal loans, auto loans, lines of credit, and mortgages, can positively impact your credit score. If you only have one type of credit account, consider diversifying your credit mix by applying for different credit accounts.

Keep old accounts open

The length of your credit history plays a role in determining your credit score. Keep old credit accounts open, even if you're not actively using them, to maintain a longer credit history.

Seek professional help if needed

If you're struggling to improve your credit score on your own, consider seeking assistance from a credit counselling agency or financial advisor. They can provide personalized advice and guidance to help you achieve your credit goals.

Build your credit with KOHO credit tools

Whether you're planning a getaway, funding your education, or purchasing your first vehicle, attaining your goals may require financial support. A robust credit score can facilitate access to superior loans and favourable terms and make it easier to plan for spending and saving for the future.

With KOHO's virtual credit card, you can cultivate effective credit management habits while earning cash back rewards. By utilizing this virtual tool, you can demonstrate responsible payment behaviour, which is then reported to major credit bureaus. This proactive approach enhances your credit history and elevates your credit score, thus bolstering your eligibility for future financing opportunities.

Protect yourself in emergencies with overdraft protection coverage. When you face unexpected expenses, we cover you from unnecessary financial strain with up to $250 zero-interest cash advance. The more consistently you repay the amount, the more funds you unlock.

Discover KOHO's comprehensive suite of credit-building resources and expert guidance tailored to elevate your credit score. Alternatively, explore the option to earn interest through a high-yield savings account, further propelling you toward your financial milestones.

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