7 Ways to Build Credit — Without a Credit Card: Implications for the Financial Markets

Building credit is a vital aspect of financial well-being, and recent discussions on alternative methods to achieve this without relying on credit cards have gained momentum. This blog post will explore the potential impacts of this trend on financial markets, particularly focusing on indices, stocks, and futures that may be affected. We will also draw parallels with historical events to forecast potential short-term and long-term effects.

Understanding the Context

The traditional reliance on credit cards to build credit is being challenged by emerging alternatives, which can include:

1. Secured Loans: Borrowers deposit a certain amount as collateral, which can help them build credit.

2. Credit Builder Loans: These loans are specifically designed to help individuals improve their credit scores.

3. Rent Reporting Services: Companies that report timely rent payments to credit bureaus can aid in building credit.

4. Authorized User Status: Being added as an authorized user on someone else's credit card can help build credit history.

5. Utility and Phone Payments: Some services allow consumers to report their utility and phone payments to credit bureaus.

6. Peer-to-Peer Lending: Engaging in peer-to-peer loans can also create a credit history.

7. Savings Accounts with Credit Reporting: Certain financial institutions offer savings accounts that report to credit bureaus.

Short-Term Market Impacts

Affected Indices and Stocks

• Financial Sector Indices:
• S&P Financials (XLF)
• Financial Select Sector SPDR Fund (XLF)
• Credit Reporting Agencies:
• Equifax (EFX)
• TransUnion (TRU)

Potential Impact

In the short term, the focus on alternative credit-building methods may lead to a decline in credit card issuances and use. This could adversely affect the revenues of major credit card companies and banks that rely heavily on credit card transactions as a significant income source.

For instance, if consumers shift towards secured loans and credit builder loans, we might see a dip in the stock prices of major credit card firms such as Visa (V) and Mastercard (MA).

Historically, a shift in consumer behavior has often resulted in a temporary decline in related stocks. For example, in 2017, a similar trend towards the use of alternative lending options led to a notable decline in the stock prices of traditional lenders.

Long-Term Market Impacts

Affected Indices and Stocks

• Consumer Finance Companies:
• Discover Financial Services (DFS)
• Capital One Financial (COF)
• Technology Companies Offering Financial Services:
• Affirm Holdings (AFRM)
• SoFi Technologies (SOFI)

Potential Impact

In the long run, the emergence of alternative credit-building methods could lead to a more diversified consumer credit market. This shift may benefit fintech companies and alternative lenders, as more consumers seek options outside of traditional credit cards.

Moreover, as consumers become increasingly aware of their credit options, we may see a growth in demand for services that facilitate rent reporting and other credit-building measures. This could significantly boost the stock prices of companies focusing on these services, such as RentReporters or other emerging fintech firms.

Historically, after the 2008 financial crisis, there was a surge in alternative lending platforms, which gradually reshaped the lending landscape, leading to the rise of companies like LendingClub (LC) and Prosper. Their stocks saw significant appreciation as they filled the gap left by traditional banks.

Conclusion

The trend towards building credit without a credit card signifies a potential transformation in consumer credit behavior. While there may be short-term volatility for traditional credit card companies and banks, long-term impacts could favor fintech firms and alternative lending solutions.

Investors should keep a close eye on the financial sector, particularly the performance of indices like the S&P Financials (XLF) and stocks of companies involved in credit reporting and alternative lending. As the landscape evolves, understanding these trends will be essential for making informed investment decisions.

By analyzing the historical context and potential future developments, we can better prepare for the shifting dynamics in the financial markets.