Credit builder loan aims to help people to improve their credit score especially if they have a low credit history. Loan or credit card approval significantly influenced by a credit score, chances for approval are likely to be higher with good credit.
Luckily, credit-builder loans are easily approved even with bad credit score. However, they require you to show sufficient income for pay-back. They will keep the amount in the bank while you pay-back the loan amount. Your on-time payments report is then forwarded to major credit bureaus namely Experian, Equifax, and TransUnion.
Since your credit scores are calculated on the basis ofinformation collected from credit reports. So, on-time payments can help you alot to tame your credit score in long run. Credit-builder loans are availableunder many names but are not advertised or popular enough. Generally, some small financial entities likecommunity banks or credit unions offer such options. Some names just for yourknowledge are ‘Fresh Start Loans’ and ‘Starting Over Loans’.
Why such options are available from banking institutions? Justdue to the reason that banks want to do business only with good customers. Andeventually you probably a customer for them from which they will love to makesome money.
Lenders generally love to setstrict limits on how you can spend the amount just to ensure that borrower isnot going to burn the loan.
Getting & managing credit-builder loan
- Findingthe loan: Shortlist credit-builder loans on the basis of the payment levelwhich you can afford easily. This is not an impressive action where you aregoing to stretch your budget for higher payments. It is advisable to select a loan with low payments and with the maximum term of 24 months.
- Apply forthe loan: After approval, the money which you borrow will go to a savingaccount. Typically, borrowers don’t have access to that account until you havepaid the loan back fully. This is just to offer highersecurity or to minimize risks which a lendertakes while offering credit to a person with bad credit.
- On-timepayments: Lenders typically promises to forward a clean report to majorcredit bureaus, when you pay the loan as agreed. But a late payment (more than30 days) can affect your score seriously.
- Watchyour credit score: You must have to watch your credit score periodicallyduring a period of credit building activity. You can get a free credit reportfrom a number of sources available online. Keep in mind that you don’t need tobe obsessed with little changes rather look for a slightly better thing.
- Withdrawyour loan + interest: Now it’s time to get your loan amount from theaccount and interest (if any) – along with a better credit score hopefully.
Where to get a credit-builder loan
Online lenders: Thereare multiple online options available just like ‘Self Lender’ where you can get2-years loans with payment plan starting at $25/month. They will forward yourcredit report to 3 major credit bureaus and you can get a rate of lower than16%.
Community banks or Credit unions: It can be tricky to find a credit-builder loan. Credit builder loans can be found in nearby banks or credit unions. Another way is to Google your state plus ‘credit builder loan’ term. Usually, credit unions offer services to members only. While membership requirements vary with a region like the residence of specific County, employment of certain companies, or anything else. However, usually they offer the lowest rates and it probably worth checking.
Lending circles: A family or friends circle can also operate a credit-building plan by using the Lending Circles program supervised by the nonprofit Mission Asset Fund. Participants typically get an interest-free social loan with an awesome feature of reporting to credit bureaus. You can search by using your ZIP code to find out if it is available to your community or not. Such circles generally constitute up to 10 participants where each one pays a certain amount every month and money reaches to one person each month. This process continues until every member of the group gets his/her share of the money.
CDFIs: If you are unable to find a community bank or credit union then you could move further by trying to find a Community Development financial entity. Such entities aim to help low-income households, and alone in the United States, the number goes beyond 1,000.
Other options for building credit
If you have depositmoney in a bank, probably you get another option to use it as an installmentloan in the form of a share – or certificate-backed loan.
In such a case you can use your money as collateral and use it until you repay your loanin full. It may be worth it to use that money by asking your bank whether youborrow against it to rebuild your credit.
On the other side, secured credit cards are another option. They can be very effective – to improve your credit score but you may have to pay a deposit first.
Lastly, an unsecured personal loan is another option one can use torebuild your credit. Such options comewithout checking your credit scores and typically resemble with payday loans.That’s why such loans have much higher rates compared with regular bank loans.