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Can You Really Build Credit Without Credit Cards?

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Visa Credit CardIn recent years, there’s been something of a backlash against the credit industry and the credit scoring industry. Some consumers don’t like the idea of using credit cards, and they are getting rid of them.

Unfortunately, the credit industry is so ingrained in our financial infrastructure that eschewing all credit can be detrimental. It’s not just lenders that look at your credit history; insurers, landlords, and even some employers might have a peek at some version of your credit report.

As a result, participating in the credit industry is a necessary evil for many consumers. But what if you could build a credit file without using credit cards or other loans? That’s what alternative credit scoring is all about.

What is Alternative Credit Scoring?

One of the arguments for using credit scoring models based on information in your credit file is that the way you handle your credit is indicative of how responsible you are in all things finance. For those who don’t use credit though, that seems unfair. You don’t need to have a credit card or a car loan to prove that you are responsible with your finances.

After all, many people with credit reports make their utility payments, rent payments, and other payments on time. They have respectable savings accounts, and never overdraw their checking accounts. All the same, though, they are considered a credit risk. This is where alternative scoring comes in.

Alternative models take a look at the non-credit financial behaviors that aren’t included in a more “traditional” credit score. FICO has an alternative/supplemental model, called the Expansion Score, that takes into account some of these behaviors, including looking at bank account activity. Experian has started including rent payments on its credit reports. Alternatives like PBRC and eCredable will score you based on your non-credit payment history.

These alternatives to the traditional credit scoring model provide those who don’t want to participate in the credit card culture a chance to qualify for car loans and mortgages that they wouldn’t normally be able to get if all that was looked as a more traditional credit score.

Does Alternative Scoring Really Matter?

While it’s a nice thought — the idea that you can build a good financial reputation without high-interest consumer debt — it’s not exactly reality yet. It’s true that these agencies can help score you based on non-credit financial behaviors. However, lenders still aren’t using them widely. Instead of having your score from eCredable accepted at almost any lender, you are limited to the partner lenders that accept the alternative score.

Another issue is that you might have to pay a higher interest rate anyway. While you might be approved for a loan you wouldn’t otherwise get, you will likely have to pay a higher interest rate than someone with a “real” credit score would pay.

Finally, you usually have to pick up the tab if you want to use alternative scoring. FICO offers its Expansion Score to lenders who want to use it, but if you want your payments to be tracked and verified by an alternative reporting agency like PBRC or eCredable, you have to pay a fee. In some cases, you need to pay up to $90 or more, just to have a single report generated.

For now, alternative scoring can help, and it’s encouraging that at least one of the major credit bureaus is including rent payments in its reporting. However, real change in the credit reporting industry is likely to be slow in coming.

What do you think? Have you used alternative scoring before? Would you consider it, or is it just easier to play along with the way things are now?

(Photo: Images of Money)

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12 Responses to “Can You Really Build Credit Without Credit Cards?”

  1. I think that, over time, as credit companies determine more accurate ways to judge risk, alternative credit scoring will become much more popular.

  2. Steve says:

    I really don’t understand why the credit card is such an evil thing. No one is forcing you to use the darn thing. Just get one and buy $5 worth of something every month, then pay it off every month. What is the big deal?

    There’s probably a good reason cards are used as the main determining factor of credibility. If you can’t even have the self control to pay off the card, how will you pay off a house or car?

    • libertyanne says:

      They are bad because they track your every purchase. I use cash and don’t care about credit scores. I’ve never seen mine. I also have NO debt. Now That’s self control. No I don’t own much but nothing owns ME either.

      • Steve says:

        But I’m saying, it’s not hard to build credit. For those few times you need it, like applying to rent a car, or a mortgage (not everyone can afford to buy houses in the Bay Area with cash).

        Again, you don’t have to use the damn card. Use it once in a while for small purchases. That’s enough to build credit. Who cares if they track 1 purchase a month? Actually, who cares if they track all your purchases? Cell phones track us everywhere doing everything anyway.

    • Anonymous says:

      Sadly, the amount of your highest balance also counts.

      My wife pays all our bills with a card a couple of times a year. Then she adds them up and sends in a payment to the credit card company-all at the same time. she actually pays the credit bill before the card receives akll the charges.

  3. govenar says:

    “high-interest consumer debt” shouldn’t be a problem; just pay off a credit card each month and don’t pay any interest (if someone is financially responsible and not using credit cards, that implies that they’d have enough money to pay their full credit card balance).

  4. Sandra says:

    I believe that I can…

  5. Yana says:

    I don’t use credit at all and don’t ever intend to take out a loan or finance anything. However, when we rented another apartment 1 1/2 years ago, our credit reports mattered to property management. At the time, our scores were okay, but within a few months of moving, my score went down significantly. The only thing different I’d done is apply for a credit card that I didn’t want because my bank marketed me when I went in to do other business. I was denied the card and my score went down. The only way we would ever buy a home is by paying outright, and that is how we buy cars as well. But if we should want to move to another rental at some point, the credit scores will matter. And I really, really don’t like that fact.

  6. YES, you CAN build credit without credit cards. I did. We filed bankruptcy in 2004 because we went overboard on the credit cards and I lost my job and was unable to go back to work for health reasons. Then it took nearly 3 years for Social Security to decide I really couldn’t work after all and by then, we were bankrupt. But we kept our home and we worked hard and we built our credit back up from the ground. We both now have a credit score of near 700 and we are building it more each day. We both have loan payments that we make regularly for this purpose. We also have kept our home and, even when my husband lost his job of 20 years a couple of years ago and had to take a lower paying job, we have managed to stay afloat and keep our credit score okay. It has not been easy, but it IS worth it. We don’t miss credit cards except now and then it would be nice to have one. But then I remember what it was like when we had them and I forget that idea in a hurry. I like living this way MUCH better.

  7. Pay Down your debts is the best advice for improving your scores

  8. Paul says:

    I believe that you do need to have at least one credit card and use it solely for the purpose of building credit.

    Use it one time per month to buy gas in your car and pay it off in full every month. Take a challenge.

    See how high you can get your credit limit by ten years. See if you can get your credit limit to fifty thousand dollars, or maybe even one hundred thousand.

    You can do this by simply using your card every month, and paying it off in full. Every year request your bank increase your limit.

    I am now thirty five years old and the bank gave me over five hundred thousand dollars worth of credit between my two cards.

    You will have phenomenal credit if you follow my challenge.

    Get over your fear of not wanting a credit card and use them responsibly and for the purpose of building credit.

    Get it solely for the purpose of building credit. Pay on it every month. You need to have a mortgage, car payment, bank loan or a credit card, if you are really wanting to build the best of credit.


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