Is your credit score poor or virtually non-existent? ‘Credit Builder’ loans can help you break into the loan system and create a credit history.
There might be a time in your life when calamity strikes and there’s a need for financial aid. At that time you might not be able to procure a loan easily with non-existent or poor credit ratings. But, even if you have a single loan record in which you have shown that you have made your payments promptly, this will go a long way in securing a loan in the future.
This is an extremely beneficial way for young or poor people to enter the loan books and gain a sense of security knowing that they can qualify for a loan if ever they are in a crunch in the future.
What are Credit Builder Loans?
A credit builder loan is when a lender agrees to loan you a certain amount that the lender holds in their account while you make monthly payments to them and build credit. You will get the full sum of money at the end when the loan is paid off.
A credit builder loan is designed specifically to help people with poor, little, or no credit or credit. A good score allows you to procure better loans, at better rates, and increase your chances of qualifying for a loan.
There are many Credit Builder loans available, such as “Starting Over Loans” or “Fresh Start Loans”. These are not extensively advertised and are typically provided by smaller financial companies, such as community banks and credit unions.
There’s no requirement for good credit for approval. However, you need to show proof that you have sufficient income to make the payments. The loaned amount is held in a bank account while you make payments.
How Does a Credit Builder Loan Increase Your Credit Score?
Credit builder loans can help improve your credit score if you pay on time. These payments are monitored and shared with top credit bureaus.
Making prompt payments on a credit builder loan can help you boost your credit portfolio because the payment information in your credit reports is valued more than any other aspect towards calculating your credit score.
Tips for Procuring and Managing Credit Builder Loans
- Examine Credit Builder Loans – Search for loans with affordable payments. Going over your budget to make higher payments won’t increase your rating significantly. It’s usually recommended to choose a low payment loan with terms no longer than 2 years.
- Apply for the Loan – Once approved, the money you’ve applied for is deposited in a savings account that you can’t access until you have fully repaid the loan. This provides a safety net for the lender for the risk taken.
- Timely payments – If you repay the loan as per the terms, your credit builder company will send a positive report to the credit bureaus. However, a payment that is more than 30 days late will negatively affect your score.
- Collect your Loan Proceeds with Interest – At the end of the loan term, you get the money with interest(as per the loan terms), and an increased credit score.
- Monitor your Credit Score – There are finance websites that offer free credit score calculation tools. Don’t worry about minuscule changes, monitor the overall trend instead.
Where To Look for Credit Builder Loans
Credit Unions or Community Banks
Finding credit builder loans can prove to be difficult. Search online for your ‘state’ along with ‘credit builder loan’. You might find credit builder loans at nearby community banks or credit unions. Credit unions normally have membership requirements, like living in a particular district, working for certain companies, attending a certain church, or by making a small donation. Through this, they may offer low-interest rates, but it doesn’t hurt to check.
CDFIs (Community Development Financial Institutions)
You can try procuring credit builder loans at Community Development Financial Institutions. These organizations are created to help lower-income communities. It might be easier to get a Credit Builder loan through CDFIs than through other channels.
One method that is used among families or friends is a credit-building plan offered through the Lending Circles program. The participants receive interest-free ‘social’ loans, and payments are reported to credit bureaus. In these groups, approximately 10 participants each agree to put in a certain amount every month and the money goes to one person. This continues in a round-robin format until everyone has received the money.
With the whole world moving towards conducting business online, it makes sense to search for Credit Builder loans online. As mentioned earlier, search for your particular ‘state’ or ‘district’ along with ‘credit builder loan’ and evaluate your choices.
Be sure to examine every aspect before making your choice.
Other Methods of Credit Building
Secured credit cards are another option that can be quite effective, but you need to show that you already have enough money to pay the security deposit.
If you are trying to build credit and need a loan urgently, you will probably have to take an unsecured personal loan. With this type of loan, the lender doesn’t secure the loan against collateral, instead, the loan is granted based on your credit history. If your credit is low, you will have to pay higher interest rates.
There are some lenders who will give you unsecured personal loans without checking your credit, but these installment loans are much more like payday loans, where the lenders don’t check your credit, but they also don’t share their reports to credit bureaus. These loans carry interest rates that can easily reach upwards of 300% or higher.