Three Ways to Build Credit Without Taking on Any Debt

Myths and misconceptions abound when it comes to the subject of credit. Perhaps one of the biggest misconceptions about credit is the notion that you have to take on a lot of debt to earn and maintain great credit scores. In reality, the opposite is true.

Your credit score is not your debt score, as some would suggest. Your debt load accounts for roughly one-third of your FICO and VantageScore credit scores, and carrying debt means you’re going to forgo most of those points.

So if you’re looking for a way to build or rebuild your credit scores without taking on a penny of debt, you don’t have to look very far.

Option #1: Credit Cards

I’m sure you’re thinking, “This guy is crazy–credit cards aren’t debt-free!” Hear me out. We all know credit cards are often vilified as the source of many people’s financial problems. However, there’s a serious flaw in this line of thinking.

Remember, you can have a credit card account without carrying any debt on it. Credit card debt is certainly a bad idea, one that can cost you a lot of money and damage your credit scores. But credit cards themselves are simply tools to buy stuff. As a credit card user, you decide whether you’ll use those tools in a manner that works for you… or against you.

There’s only one extension of credit out there where debt, interest, and fees are all optional. It’s not mortgages, not auto loans, not student loans… and those are debts that are commonly considered to be “good” debts. But the credit card is the only extension of credit where you don’t have to pay fees (there are numerous fee-free cards), interest (if you pay your balance in full each month, then your interest rate becomes meaningless), or debt (if you charge only what you were going to buy anyway and pay it off promptly, then it’s not debt, it’s normal spending).

Related: Eight Tips to Make Credit Cards Work for You, Not Against You

Option #2: The HELOC

If you own a home or other property, you may have what’s called “equity.” Equity is the value of the home or property that you own outright relative to the portion owned by the bank. So, for example, if you have a house that’s worth $500,000 and you only owe $350,000 to the bank, then you have $150,000 of equity.

You can borrow against some of the equity in your home, either through a home equity loan or a home equity line of credit, or HELOC. And while a home equity loan will put you into debt with monthly payments, a HELOC is kind of like a credit card. It’s a line of credit that sits there waiting for you to tap. If you never tap it, then you won’t ever have any debt or a monthly payment. Most HELOCs do have annual fees, but they’re very low — typically less than $100 a year.

Having an existing HELOC gives you a fantastic security blanket in case you need access to a lot of money very quickly. Just be aware that your HELOC is secured by your home, and you likely had to pledge your home as collateral. That means if you default on a HELOC, the bank can take your home. The solution? Don’t default.

Related: How a Home Equity Line Impacts Your Credit Score

Option #3: Try Having Utilities or Rent Added to Your Credit Reports

This is a long shot, but it can work. Hopefully you pay your utilities or rent on time every month. But unfortunately, even if you do, these payments are probably not helping you to build any credit — at least not without a little work on your end. In most cases, utility and rental accounts only appear on your credit reports if you default on them.

While it doesn’t always work, you can ask your utility companies and your landlord or property management company to report your account history to the three major credit bureaus. Your request might be turned down — but you’ll never know unless you ask.

Additionally, when it comes to your rent, you can also consider enrolling in a rent payment service that works with Experian RentBureau. Doing so might help you get your rent payments added to at least your Experian credit report — offering one more way to build credit without taking on a dollar of debt.

More by John Ulzheimer:

John Ulzheimer is an expert on credit reporting, credit scoring, and identity theft. The author of four books on the subject, Ulzheimer has been featured thousands of times over the past decade in media outlets including the Wall Street Journal, NBC Nightly News, The Los Angeles Times, CNBC, and countless others. With professional experience at both Equifax and FICO, Ulzheimer is the only credit expert who actually comes from the credit industry. He has been an expert witness in over 230 credit related lawsuits and has been qualified to testify in both federal and state courts on the topic of consumer credit.

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