Is it Necessary to Have a Credit Card to Build Credit?

Last updated 04/08/2024 by

If you have bad credit or you’re looking to get your first credit account, a credit card can help you establish a great credit score. But getting a credit card isn’t always wise or possible.

For example, student credit cards typically have an income requirement, which is hard to meet if you’re going to school full time. And secured credit cards require you to put up a deposit of $200 or more just to get approved. Finally, if you’ve made spending mistakes in the past, getting another credit card may not be in your best interest.

In this guide, we’ll discuss how a credit card can help you build credit. But we’ll also cover other ways you can achieve that goal if getting a credit card isn’t possible.

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How a credit card can help you build credit

Credit cards are a form of revolving credit. This means that you can use the credit limit on your card, pay it off, and use it again. There’s no set repayment term either, which means you can use the same credit card for years.

There are four ways that using a credit card can help you build credit over time.

Payment history

Your payment history makes up 35% of your FICO credit score. So, using your credit card regularly and paying off your balance on time goes a long way to building credit. If this is your first rodeo, though, here’s a trick. Instead of just making the minimum payment each month, pay the balance in full. That way, you’ll never carry a balance or pay interest on your purchases.

If you accidentally miss a payment, don’t worry. A late payment won’t get reported to the credit bureaus until it’s 30 days late. So, as long as you pay what you owe plus the card’s late fee, you won’t lose your momentum.

One way to ensure you’ll always pay on time is to set up automatic payments from your checking account. Just be sure you always have enough in your checking account to cover the bill.

Credit utilization

How much you owe makes up 30% of your FICO credit score, and your credit utilization is a huge part of that. Your credit utilization is essentially your credit card balance divided by your credit limit. The credit scoring models calculate this number for each card and across all your cards.

There’s no hard-and-fast rule about what your credit utilization should be. But the higher it is, the more damage it can do your credit score. So, it’s best to keep it as low as possible. You can do this by using the card less or by making multiple payments per month to keep it low.

If your score does drop because your credit utilization is high one month, don’t fret. As soon as you pay down the balance, your score will bounce back. Just try to avoid racking up a high balance often.

Length of credit history

This factor makes up 15% of your FICO credit score, and it’s mostly based on how long you’ve been using credit. So, if you have other open accounts, you’re already getting some value from them.

If, however, you’re new to credit, be patient. Over time, the amount of time you’ve been using your card can help boost your credit score. As you do, though, avoid opening too many accounts. That’s because your average age of accounts is also taken into consideration. So, if you have a lot of new accounts, it could hurt your credit.

Credit mix

Ten percent of your credit score is based on the type of credit you have. This means that it’s good to have a revolving credit account and an installment credit account.

Let’s say, for instance, that you just have student loans. While paying those back can help you build credit, diversifying with a credit card could help even more. The same goes for auto loans, personal loans, or mortgage loans. That said, don’t apply for a high-interest personal or auto loan just to build credit.

A new credit card can also ding your score

Full disclosure. Getting a credit card may lower your credit score by a few points when you first get it. About 10% percent of your credit score is based on how many new credit accounts you have opened.

3 ways to build credit without a credit card

If using a credit card isn’t right for you or you can’t qualify, there are other options available. Read on to learn about each in turn and choose one based on which is the best fit for you.

Credit-builder loans

Credit-builder loans are installment loans that are specifically designed to help you boost your credit history. “Traditionally, credit builder loans require an upfront deposit,” says James Garvey, co-founder and CEO of Self Lender.

You put up an upfront deposit equal to the loan amount into a savings or certificate of deposit. Then you get your money back plus interest when you pay off the loan in full. Not everyone can afford a deposit like that, though.

Responsibly using a credit card and a credit-builder account together is a great way to build credit and diversify your credit history”
James Garvey — CEO of Self Lender

Self Lender eliminates the need for that deposit. “The customer experience is a savings app that builds credit,” says Garvey. “Choose your credit builder account and term, make your monthly payments, build credit, and then get your money saved up at the end.”

In other words, make your payments with interest over the life of the loan, which boosts your payment history and length of credit history. Then once you’ve paid it off, you’ll get the full loan amount plus the interest earned in the deposit account.

At that point, you can use part of the loan amount to put down a deposit on a secured credit card to continue building credit. Or you can use it for something else.

“Regardless of how you started the credit builder, you now have a loan obligation that has to be repaid over the 12-month or longer term,” says Garvey. “As you repay the loan in monthly installments, your payment history is reported to the credit bureaus.”

Authorized user status

If you can’t have or don’t want a credit card of your own, consider getting added to someone else’s account. Any credit cardholder can add authorized users on their credit card account. And the nice thing is that you’ll get all the credit benefits from the card account without doing any of the work.

It’s important, however, to ask someone who uses their credit card responsibly. This means making payments on time now and in the past, and keeping their credit utilization low. If they have an established pattern of irresponsible credit card use, it could hurt your credit instead of helping it.

That said, if things get too bad and the account goes delinquent, you can request that the credit bureaus remove the account from your credit report. That way, things don’t continue getting worse while you wait for the primary cardholder to remove you as an authorized user.

Get a co-signer

There aren’t many credit card issuers anymore that allow co-signers. The table below includes a list of issuers that do. But if you need a personal loan or auto loan, you could get approved if you have a co-signer with good credit.

This option may be a tough sell for some, though. Being a co-signer means that you’re equally liable for the debt. So, while you’re the one making payments, defaulting could ruin both your and your co-signer’s credit.

So, it’s important to have a conversation with a potential co-signer and ensure that they can trust you. Then make every effort to make good on that promise.

What’s the best way to build credit?

There’s no single best way to build credit for everyone. So, it’s important for you to consider all of your options before choosing one. If you’ve had bad experiences with credit cards, for instance, you may be better off with a credit-builder loan or getting a co-signer for another loan.

If, however, you generally use money responsibly, getting a credit card of your own or being an authorized user could work. Think carefully about each of your options and pick the one that best fits your needs.

In some cases, it might even be worth considering more than one option. For example, getting a credit card for yourself and getting added as an authorized user on someone else’s card.

“Responsibly using a credit card and a credit-builder account together is a great way to build credit and diversify your credit history,” says Garvey.

Whatever you choose to do, it’s important to consider which option or options work best for you. Also, consider your ability to use credit responsibly. If more than one option is too much for you, it might be best to start with one option for now. As you develop good credit habits over time, you can consider adding more options.

Ben Luthi

Ben Luthi is a personal finance writer and a credit cards expert who loves helping consumers and business owners make better financial decisions. His work has been featured in Time, MarketWatch, Yahoo! Finance, U.S. News & World Report, CNBC, Success Magazine, USA Today, The Huffington Post and many more.

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