Editorial Policy

How to build credit without cards

Miranda Marquit

January 7, 2015

No matter where you go or what you do, someone will eventually want to pull your credit report.

It's not just for getting a mortgage, either. Insurers, landlords, cell phone providers, and even some employers will want a look.

Your credit is your financial reputation. In order to build a good credit file, you need to establish that you can handle your finances.

The fastest way to develop a good credit history is through responsible use of a credit card. But what if you don't want a card? Can you still build credit?

Steve Stewart, the founder of MoneyPlanSOS, is convinced that you don't need a card to get by in today's world. He talks about saying no to our pervasive credit culture, offering advice on how to manage your money without kowtowing to the credit scoring industry.

“You don't need a credit card to build credit, no matter what anyone tells you,” Stewart insists. “If you like the convenience of plastic, use a debit card, which is connected to your checking account and doesn't constitute a loan each time you use it. If you like rewards, there are plenty of loyalty programs that don't require credit card use.”

But how do you do it?

The first step is making sure that you have a financial footprint that can be followed, even if it doesn't involve borrowing money. “Always make sure to have one checking account and one savings account in your name,” says Michael Foguth, a financial expert with Foguth Financial Group. “If you're married, make sure at least one household bill is solely in your name, and pay it on time.”

“There are ways to live without credit cards in today's world.”
Steve Stewart, MoneyPlanSOS

Even if you aren't using cards, you can establish a credit history with small personal loans taken from your bank or credit union or with an auto loan.

If you don't make these payments on time, you will end up with poor credit. Additionally, if you miss utility payments and rent payments, you can still be reported to the three major credit bureaus, especially if your account is turned over to collections. Establish good financial habits, live within your means, pay all your bills, and you can leave a trail of financial information that can be used to establish credit — even if you eschew credit cards.

Called “shoebox credit,” you can build your credit through records that you pay on time, such as your rent and utilities. The federal Equal Credit Opportunity Act requires that if a consumer requests it, lenders have to consider alternative credit information.

If you don't want to compile the records yourself, there are alternative credit agencies that do a lot of the work for you for a fee.

Rather than getting hung up on using credit cards, Stewart suggests you look into alternative credit reporting agencies. One of his favorite alternative reporting agencies is eCredable. “With eCredable, your financial habits are accessible, even if you aren't using credit cards.” PRBC is another alternative reporting agency, and up-and-comer Happy Mango hopes to provide new metrics for determining creditworthiness.

ECredable CEO Steve Ely says that alternative credit scoring models are growing in popularity as more consumers become disenchanted with the current system. Most lenders refer to the FICO scoring system, which bases its model on information gathered from credit bureaus TransUnion, Experian and Equifax. (You can check those agencies' reports for free once a year at AnnualCreditReport.com and your FICO scores at myFICO.com at about $20 each.)

“With a traditional credit bureau, information is reported at a creditor's discretion,” Ely points out, although you can dispute errors on your credit reports. “With alternative models, the consumer has total control over which trade lines to have included.”

Alternative credit reporting is more about showing financial services providers that even though you may not be borrowing money, you are financially responsible. With an alternative model, you ask that the agency verify specific trade lines. “You can include rent, water, power, insurance, phone, child care or any other payment you make on a regular basis that can be verified,” says Ely.

Once you specify which trade lines to follow, the agency can call the providers and verify that you have made regular payments for a long period of time. In the case of eCredable and PRBC, once the lines are traced (Ely recommends four or five for best results), you are assigned a credit rating based on a letter grade, with “A” the highest. This rating can then be shown to financial service providers that accept the alternative agency's assessment of your creditworthiness.

One hitch: alternative credit reporting agencies charge consumers for each billing account that is verified. The major credit bureaus do not charge the consumer for that service.

While some credit agencies, such as Experian, are starting to include rent payments, and the new FICO scoring model, FICO 9, does value rent and utilities, these initiatives are slow to catch on in the industry, and still require landlords and utility companies to set up regular reporting of positive behaviors, rather than just turning your account over to collections when you miss payments.

Stewart points out that consumers do have choices once they start looking outside the credit scoring industry box. “There are ways to live without credit cards in today's world,” he says. “And you can even build a good credit profile without resorting to using credit cards at all.”