Millions of consumers have what are called "thin credit files," meaning they have little or no record of using credit. About 25 percent of Americans don't use enough credit to build a FICO score , according to FICO, the San Jose, Calif., company responsible for the gold standard in credit scores.
If you would like to start building credit but don't want to get a credit card -- or simply can't -- don't give up. There are other ways to build credit that don't require using a regular credit card. Among the options available: Passbook or CD loans, credit builder loans and even alternative scores.
In building a credit score, it matters that you're paying bills on time and managing money wisely. What matters even more is who sees your shining financial behavior.
The first point of reference for most creditors is your credit report . The most common credit reports -- those issued by the credit bureaus Experian, TransUnion and Equifax -- include information from lenders about your payments on credit cards, car loans, mortgages and student loans. Other types of behaviors, such as paying your rent or utility bills, or managing a checking account, may fly under the radar -- unless you lapse so far behind that an account is sent to a collection agency. In other words, your bad deeds in those areas are noted.
Your FICO score is also important to consider when thinking about how to spread the news about your creditworthiness. FICO gets its data from the credit bureaus and uses five factors to determine your score : 35 percent of your score comes from your payment history, 30 percent from how much of your available credit you're using, 15 percent from the length of your credit history, 10 percent from new credit and 10 percent from your credit mix. Scores range from 300 (dismal) to 850 (perfect).
With those facts in mind, here are some credit-building options that don't require a credit card, and a look at how they stack up.
1. Credit builder loans. Credit builder loans let you get a taste of handling credit at a low risk to yourself and the bank or credit union lending the money. It's kind of like a savings plan, only it helps you build that all-important credit score.
You essentially lend money to yourself. Say the loan is for $1,000. First, you pay that $1,000 into an account. Depending on the lender, you could do this by depositing a lump sum up front or by making deposits over time -- say, $100 a month for 10 months. The bank or credit union stores that money in an interest-bearing account. After the entire amount is in your account, you can then take out a line of credit for $1,000 (with your deposit as your collateral). You can then borrow and repay against that line of credit. You will be charged interest at a higher rate than you earned, but you will get experience working with credit and your timely payments will show up on your credit record.
Is the information reported to the credit bureaus? Yes. Both banks and credit unions report this history to the Big Three credit bureaus.
Will it help build your FICO score? Yes. Installment loans count toward your credit mix and timely payments are considered in your FICO score.
2. Passbook or CD loans. If you have a certificate of deposit or savings account, your bank may let you use that as collateral for a loan. Some banks will let you borrow 100 percent of the amount in your account. Others will restrict you to 85 percent or 90 percent.
You'll pay a small origination fee, plus interest (more than what you're earning on the account). And you won't be allowed to touch the CD or savings account until the loan is repaid. But the loan should show up on your credit record as a secured installment loan, helping you to build credit with your timely payments.
Is the information reported to credit bureaus? Faithful payment is reported, says David Pommerehn, assistant vice president and senior counsel of the American Bankers Association, a Washington, D.C.-based trade group for bankers.
Will it help build your FICO score? Yes. Installment loans count toward your credit mix and timely payments are considered in your FICO score.
3. Pay-for data reports. With paid credit reporting, you buy the privilege of having nontraditional payment histories compiled and reported to the credit bureaus. This might be especially useful for renters. Experian and TransUnion both include rent data on your credit report, but you can't report that data yourself. That's where third-party agencies come in.
At least three such agencies collect and report rent data: Rental Kharma, William Paid and RentReporters. Their fees vary from free to $9.95 a month. But keep a couple of things in mind if you request your landlord use one of these services. First, property owners are not required to participate in this reporting. Mom-and-pop landlords generally won't because of the time and money involved. But big renting conglomerates often will, says David Jones, president of the Association of Independent Consumer Credit Counseling Agencies, a trade group based in Fairfax, Va.
The second thing to remember about reporting rent payments is that it will not help your FICO score. Still, the payments will show up on your credit report and that can help your overall credit standing to lenders viewing your credit reports.
Is the information reported to the credit bureaus? Yes, if your landlord participates. But the information does not contribute to your FICO score.
Will it help build your FICO score? No. The traditional FICO score does not take rent payments into account unless they are in collections. But the less-widely-used VantageScore, the score created by the Big Three credit bureaus, does.
4. Alternative scores. Besides the traditional FICO score, all sorts of other credit scores exist. Some of these scores take into account rent payments, utility payments and other financial data not included in the regular FICO score. FICO itself has the FICO Expansion Score, which uses nontraditional data, such as checking account management to derive a score.
Whether they matter or not depends on the lender you are trying to impress. Some lenders look only at FICO, others have their own scoring systems, and still others look at a number of scores and data sources.
Even if a lender won't see a particular kind of credit score, it still may have value for you. A so-called educational score may help you build credit indirectly in the same way a scale helps someone lose weight: by keeping track of your progress, which is key to reaching goals.
One example of an educational score is eCredable. Consumers sign up for the service and list the bills they pay each month, along with the name of the service provider, account number and payment due dates. eCredable turns that information into a score, from A for excellent to F for bad. The company's "credit rating simulator" helps users project how their credit rating will rise or fall if they make changes to the way they pay bills. eCredable will also provide verification of on-time bill payment to lenders for a fee of $20 to $30 per bill.
Do lenders see these scores? Maybe, but alternative scores are not used as commonly as the traditional FICO score.
Are alternative scores reported to the credit bureaus? Probably not. Two of the three "Big Three" credit bureaus do not receive reports from eCredable, according to the Consumer Data Industry Association, a Washington, D.C.-based trade group for firms that collect and report consumer data.
Can any of these methods add up to a meaningful credit report? Yes, says Norm Magnuson, spokesman for the Consumer Data Industry Association. Credit cards, mortgages and car loans are biggies; still, "many other types of loans commonly reported to credit bureaus contribute to a healthy credit report," he says.
See related: 5 ways to rebuild credit after bankruptcy , Nonprofits innovate to help low-income people establish credit , Why your traditional credit score is becoming obsolete
