How are you supposed to build credit if you can't qualify for a credit card because you don't have a credit score?

There are several ways to use cards to build your credit score, such as using secured credit cards backed by an initial deposit or instant-approval cards such as department store or gas station cards. However, there is a unique alternative to building a credit score that does not require a card or a traditional loan at all: the lending circle.

The lending circle concept is familiar throughout the world — lending circles are known as tandas or cundinas in Mexico, hui in parts of Asia, paluwagan in the Philippines, and susus in Western Africa. However, the North American version can have the added effect of building credit scores for members that have limited alternatives to traditional credit.

Lending circles are a form of installment loan where a select group of people all chip in each month to provide a pool of money that is in turn loaned to each member of the group. Members take turns until all members have received a loan amount.

Effectively, a lending circle is a group of people lending money to each other at no interest. Circle members collectively decide on the amount for the group loan, and there are no restrictions on the use of the loan.

By making regular on-time payments to the lending circle, members can build a positive credit history that in turn leads to the ability to be scored by the credit bureaus — paving the way to a good credit score.

Any group of people can form a lending circle and loan money to each other, but for a lending circle to have an impact on your credit score, it needs to be formalized through an organization that tracks the payment information and reports it to the credit bureaus.

The founder of lending circles, the non-profit San-Francisco-based Mission Asset Fund (MAF), formalizes the process by having all participants sign a promissory note or contract. In turn, MAF records all payments and reports them to the major credit bureaus.

However, MAF goes further by requiring that all lending circle members take MAF's online financial training class to guide them on the path to financial success. Members can choose topics that are the most relevant to their personal situations.

While there are still risks that a member could simply take a loan increment and never repay it, going through MAF reduces that risk (as does the fact that you are entering the lending circle as a group).

Lending circles fill another void in helping lower-income people access funds for short-term cash flow problems without the need for payday lenders or other short-term loan providers that charge extremely high interest rates.

Lending circles are not for all — you do need enough income to make your regular payments — but for those with more of a day-to-day financial existence, lending circles can be a reasonable path to smoother cash flow and eventual access to affordable credit.

MAF is expanding their efforts through partner non-profit organizations in order to increase nationwide access to lending circles. To find out if there is a lending circle provider near you, check with and enter your zip code.

If you are trying to build credit and have a group of friends who are in the same position, consider a lending circle as a way for you to build credit with people that you trust — and do so without the burden of interest payments. How can you go wrong with that combination?

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