Can you Build a Credit History Without Getting a Credit Card

Credit Card

Recently, when visiting MyFICO.com, I looked up the question, “How do I go about building my credit history.” This website that’s the authority on credit scores gave me two options:

  • Apply for and open a new credit card.
  • Open a secured credit card.

Wait a minute…does that mean that in order to get a credit history, I have to get a credit card? After a bit of research, I was pleasantly surprised to find out the answer is NO! While you will need a loan in order to build a credit history, that loan doesn’t have to come from a credit card company. There are several ways to build a credit history and get a credit score without getting a credit card:

  • Borrow from Yourself – This is the easiest method to establish your own credit history without a credit card. Buy a Certificate of Deposit (CD) from a bank. Then take out a secured loan against the CD for the same amount of time. Put the money you borrowed in a high-yield checking account. Then use the money you borrowed to payback the secured loan. You’ll be establishing a credit history and earning interest on your checking account and CD. There are some downfalls to this method. You need the starting capital to fund the CD. You could end up paying more interest on the secured loan than earn through your CD and checking account; however, it’s probably less than what you’d pay in fees and interest if you used a credit card. Just make sure to weigh the true costs before going down this road.
  • Federal Student Loan – There are several requirements to be eligible for federal student aid however, an established credit history isn’t one of them. As long as you’re going to a school that participates in federal student aid programs and meet the other requirements, you can take out a federal student loan. The interest rate for a new subsidized and unsubsidized loan generally has a fixed interest rate of 6.80%, which is substantially better than a typical credit card interest rate. The only catch is that your lender may not begin reporting the loan until you begin paying it back. So if you wait until after college to begin paying back your student loan, it could take years to establish a credit history.
  • Co-signing a Loan – Many banks will provide a loan if you have a co-signer with a good credit history. However, it may be difficult to get someone to co-sign on a loan, because of the inherit risk associated with it. If you’re lucky enough to get a co-signer, make sure that you make timely payments because with this method, it not just your credit history at risk. Your payment history will also affect the co-signer’s credit history. An alternative is for you to be the co-signer. If you know someone that has a high credit score, is responsible and taking out a loan, you can “game the system” by being their co-signer. As they make timely payments on their loan, they’ll be helping you establish a credit history . Be warned, if they default or make late payments, this will negatively affect your credit score.

While you’re building a credit history, it’s a good idea to keep an eye on your credit report. You can sign up for a credit monitoring service or get your free annual credit report at AnnualCreditReport.com. Make sure to review what’s listed and dispute any credit mistakes. If there are mistakes with more than one credit bureau, you’ll need to address them separately.

{ 19 comments… read them below or add one }

1 Jeff January 27, 2010 at 1:02 pm

Thanks for looking into this question that many of us have often wondered about. I haven’t used a credit card in 2 years and the balances that were in my name are paid off. My wifes score remains good because the balances in her name and paid on time. I’ve seen a steady reduction in my score over the last 3 months. I can see doing the CD work around for maintaining credit, but there is no way I would co-sign. The next thing I will need credit to purchase will be a larger house and I’ll just have to try the manual underwritting companies, because at the rate my credit score is dropping (with zero non mortgage debt) my score will be VERY low by the time I’m ready to buy the next house.

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2 Dirac January 27, 2010 at 1:07 pm

Or you could get a credit card. I have no idea why people fear them so much. If you cannot control your spending on a card just because it is there then you probably deserve a lower credit score because you lack financial responsibility.

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3 Kyle January 29, 2010 at 7:30 am

Yes, or you could get a credit card. The problem is the lack of responsibility people seem to have once they get their little plastic friends. I have been successfully using credit for the last several years without incident or running up a massive balance. It is just a balancing act that some people aren’t good at. If you don’t have it, don’t spend. Sounds simple but is hardly ever executed properly.

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4 Lili February 7, 2010 at 3:32 pm

Or you could have married a fiscally irresponsible jerk who maxed out all your credit cards and bankrupted you in just 10 years, then refused to accept responsibility for any of the debt because “its all in your name.” Then he had the gall to whine because I refused to give him one of the two cars we purchased (with my money and credit) when I divorced his sorry ass.

I had no problem controlling my credit card usage prior to getting married, and I’ve had no trouble not even using the damned things since I left the sorry bastard. But its MY credit that’s been tanked, and it will take years to rebuild my credit. It sucks, because his credit is now better than mine is.

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5 Brandon Martinez February 25, 2010 at 9:27 am

I’m very sorry to hear that.

Even though I have a high trust in my wife, we reach have our own separate credit cards that in turn, we both manage together. This is how we are setup:

• We each have a student credit card. No interest on balances under $250. We’ll use these to buy small, fun things, or if something comes up that we’d like to spread payments out over a small period of time. Can be really handy when we use them together ($500 without interest sounds great).

• I have an Amazon credit card. I only put purchases I would make anyway, regardless if I had a credit card or not (e.g. gas for the car, some student bills). At the end of the month, I pay it off no matter the balance (I think there’s close to a 24% interest rate, so forget that).

However, she has co-signed on a few of my student loans. So, her inherit risk is *much* higher than mine. However, I would never leave her with that debt, regardless of what happens between us. I think it’s pretty low for anyone to do that.

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6 Damien February 5, 2010 at 2:19 pm

Borrowing from yourself sounds like an expensive proposition. If you’re doing this to improve your credit rating, even with a secured loan, you’re probably going to get a high interest rate (say, 18%), and at BEST, your CD plus saving interest is going to return 2%. That’s a pretty high loss (and hassle, if your money needs to effectively be tied up in a CD for a year) just to gain a few credit score points…
Still, though, it might be gameable if we knew what the agencies were looking at. For instance, if you took out a number of very small, very short-term loans, could you maximize the score impact while minimizing the interest paid?

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7 Carlos Rivera February 5, 2010 at 2:47 pm

Get a credit card put your normal monthly expenses(electric,water, rent, etc..) on it and pay off the balance each month. This way you don’t pay interest and you improve your credit score.

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8 Kyle February 8, 2010 at 10:59 am

This isn’t a bad suggestion. The thing is you HAVE TO exercise responsibility and not use the card for other things that you can’t pay off at the end of the month. As Lili so poignantly showed us not everyone can be so responsible with their credit cards.

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9 Victor February 5, 2010 at 2:52 pm

Does this apply to rebuilding credit as well?

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10 Kyle February 5, 2010 at 11:03 pm

I have never owned a credit card or borrowed money for anything. The ONLY thing I will borrow for is a house that I will buy in the future. The risk just is not worth the reward of have a CC or having a good credit score. I pay cash for everything, and I don’t make that much money.

I have never heard of a millionaire making his money on the ‘points’ you get from the credit cards. Also, I doubt many of them care what their credit score is!

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11 Curtis February 6, 2010 at 1:11 pm

Good luck getting that loan on your house. I’m all for paying in full for everything and it’s something to be proud of. But why not open a free checking account and use a high reward no annual fee credit card as well? You get free rewards for things you were gunna pay for anyways.

There are many instances of people who are so proud of paying cash only for everything, but when it comes time for a loan for a car or a house, having no credit history severely hurts them.

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12 Kyle February 7, 2010 at 12:19 am

I like the simplicity of my financial life. For years I’ve been taught that “You HAVE to have credit!!” I have just found that not true. I pay cash for everything, when I buy it, its done. No Bills. No forgetting to pay someone for something I can easily buy myself. No one can come say, “You owe us $XXX, and were going to hike up your rate.” I hear people at work bellyaching about car loans and credit card rates. I just don’t think its worth the risk. ( I know everyone’s situation is different, so I’m not judging).

I am sure many of you never forget and never have to deal with that, but it can happen. I like to eliminate as much risk as possible, and to me, credit is a huge liability. I have an emergency fund, and just use that if there is a true emergency!

Curtis, I will never borrow money for a car. I will pay cash. I would rather drive a car that smokes and shakes for a while, save some money, and buy a good, used car.

As for a house, if I take a loan, it will have to be through a manual underwriting firm. I would love to rant about what a credit score boils down to, but that’s for another day!

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13 Kyle February 8, 2010 at 10:56 am

I think it is great you have chosen to go the zero debt route. As you already pointed out though it is only simplified up to a point. It does make things more difficult in certain situations like buying a home. I don’t know many organizations that do true “manual” underwriting.

I know Dave Ramsey talks about it all the time but not a lot of banks/brokers are going to be willing to do it. That limits your choices and while not eliminating your ability to get a loan it certainly hinders your ability to negotiate a better rate.

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14 Chris February 7, 2010 at 3:46 pm

@Kyle,

Good luck getting a job if you have no credit and your employer pulls your credit score to see just how responsible you are with money. Credit scores help determine a.) your insurance premiums b.) the jobs you can get and c.) how much money in interest you’ll pay on any type of loan.

You can work around the last one by never borrowing, but not the first two.

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15 Kyle February 8, 2010 at 10:36 am

Hiring agencies don’t necessarily look at just your score when pulling your credit. In fact their main focus is on your responsibility with credit. Making sure you don’t pay late and aren’t in a mountain of debt that could affect how you do your job or cause you to embezzle/steal to get ahead.

If all they look at is the score you probably don’t want to work their anyway because they aren’t doing their research very well.

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16 Kyle February 9, 2010 at 4:08 pm

@Chris

This can get confusing with two Kyles! I have a job, a very competitive job that requires very high security clearances. To my knowledge, not having a credit score did not hinder my process. Even if it did, it clearly didnt stop it!
I have seen that some companies want higher security deposits, ect. But that has not really been a big deal at all, I just pay the cash(that I have saved up).
So I can only see validity in one of your points. a) maybe my insurance is higher, but if so, marginally. b) clearly not true..I can not discuss my job, but it is highly sought after. c) NA. I will not be taking out a loan for anything except a house, which I will have a good percentage of the total as down payment anyway. Even if I don’t get the *best* rate, it wont kill me in the long run as I will pay it down as quickly as possible!

@Kyle Ya, if they base your worthiness to work for them on your credit score, you probably want to look elsewhere!

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17 Sarah February 11, 2010 at 8:03 pm

I have been talking to a few folks that are starting to get charged a daily interest rate on their cc because they pay it off every month. The banks don’t like giving away free services so they will charge a nice interest rate on those few days that you have borrowed money. More cards will probably go to that if more people pay it off each month. My score will be dropping shortly because I started being responsible with my money so that I don’t have to borrow anything and talked to HR at my last job to see how that could affect my hiring. They stated that a no score because you pay your bills is much better than a bad score because you don’t pay your bills. If they know what they are doing, the non score should not be a huge factor and if they don’t know what they are doing, you probably don’t want to work for them.

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18 Awareness Home Funding February 17, 2010 at 3:25 pm

As a lender it is incredibly frustrating when a client has “behaved” by having no debt and has gone an extended period of time doing so. Unfortunately, because some have not behaved, a credit score is (to date) the best way to determine a person’s responsibility toward debt. There are still some lenders out there that will manually underwrite a loan, but they are also becoming fewer and farther between. It doesn’t take much though to develop a score, and a credit card doesn’t have to be a “major” provider. A card from a local retailer for a nominal amount will also work to establish a history of behavior. Using a card for just groceries or gas and then paying that off is all it will take. If more consumers take responsibility though, perhaps the pendulum can swing in the other direction again. One can hope.

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19 Abby June 7, 2010 at 11:09 pm

I’m 20, & instead of getting a credit card (because when I was trying everyone was freaking out about the economic crisis & wouldn’t give me one) I got a small car loan with a co-signer, & I’ve been making steady payments on it for well over the minimum, any extra cash I get goes towards that loan, etc. The problem I’m seeing isn’t really a problem, it’s more just a question no one really seems to know the answer to: if I have the opportunity to pay off a 36 month loan in 5 months instead, which I do, will it even count towards building my credit? Should I just keep/invest/spend the money instead, & pay it off just a little early, or what? I keep getting mixed advice & in the new economic climate, no one really seems to know what to do! I want good credit so when I go to medical school, I can get good loans & not have to work as I’m trying to concentrate on classes, not so I can blow thousands on shopping trips & be living the high life outside of my income… & no one really seems to be able to tell me how to do this the best way. It’s a little bewildering.

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