For those whose credit may not be where they'd like it to be and also for those who have yet to start building credit, there are loans out there that will allow you to work on building up that score. Often called credit-builder loans, these are designed to get you moving in the right direction as far as establishing, or if it is the case, reestablishing your credit so that ultimately you can get approved for more traditional loans. In this article, we look closer at what a credit builder loan is and how it could potentially help your credit score.
The good thing about getting a loan to build credit is that you do not initially need a good credit score to apply. That is to say, these are generally created for people who have lower credit scores, or no credit score as the case may be. There is usually an income requirement as the lender wants to make sure you have the money to make the loan payments. Many experts will say that loans for building credit or credit-builder loans are often better suited for those just starting versus people who already have credit and are consequently trying to raise their score. For those credit newbies, a credit-builder loan on average can raise their credit score by as much as fifty points or more.
Understanding a credit builder loan
When it comes to loans for building credit, they can go by a variety of names. For example, some lenders may refer to them as credit-builder loans, some may call them fresh start loans, and others use the term starting over loans. Usually, these types of loans to build credit will be more readily available through smaller banks and lending institutions.
The way that a credit builder loan works is quite simple, and not necessarily like you would imagine when thinking about a more typical bank loan. You are approved for an amount. At this point, the money for which you were approved stays in the bank. It is therefore not accessible to you at that time. You would then start making payments to the bank on that total loan amount. Once you've paid the loan off in full, this is when you can get the money out of the bank and into your account. You could think of a credit-builder loan as a type of savings account. And at the same time, you are working to build up that credit score. You do this of course by ensuring that you make all payments, and you make those payments on time. This type of loan is a win-win for those with no or bad credit and the lender. The borrower gets to work on their score and the bank in turn isn't taking a risk as the money stays with them until the loan is repaid in full. Again, the critical part of getting a loan to build credit is that you make those payments exactly when they are due, otherwise, if you fall behind, you will defeat the purpose of this type of loan.
Managing your loan
As with any type of bank loan, you want to make sure that you do your homework first and understand exactly what you are signing up for as far as your credit-builder loan is concerned. First off, you want to be sure that you can afford the loan payments. So shop around and find a credit-builder loan that has termsrates that make the most sense given your situation. Perhaps the most important part of taking out a loan to build credit is choosing one that reports to all 3 credit bureaus. After all, this is how you build credit.
It cannot be stressed enough that with any loan or any credit card, you make your payments on time to boost that credit score. Late payments will hurt you and consequently hamper your ability to work on building credit. Remember, if you are more than thirty days late this will go on your credit report!
Once you are invested in building that credit, you want to stay on top of where your score stands. In other words, be diligent about checking your credit score. Numerous sites allow you to check at least one if not all three of the credit bureaus for free.
Remember with a loan for building credit, you don't get the money until you've paid the loan off in full. This means that when you do receive the funds, they are already yours and you don't have to worry about budgeting for monthly payments any longer. The question thus stands: what are you going to do with that money? You should carefully consider your options here as you want to start making smarter money choices, especially where your credit is concerned. A good thing to do is to put some aside as a reserve fund. Let's say something unexpected happens such as your car needs a major repair. This way you will have money set aside for this and won't have to use credit to pay for the repairs.
Finding A Credit-Builder Loan
It might be that you are not able to get a loan to build credit through the bank you are using now. Not all lending institutions offer this type of loan. Some of the more common places to go for a credit-builder loan include:
Credit Unions. Credit unions as they are smaller institutions, often do have this type of loan for building credit available. Also, you might check with your local community bank. You could also conduct an online search of credit unions and banks in your area by typing in "credit-builder loans." A simple strategy, but one that usually works.
Another popular path for finding a loan to help build your credit would be an online lender. Many online lenders specialize in just this kind of loan. And the good thing about working with an alternative or online lender is that their criteria are usually not as stringent as those of some other kinds of lending institutions. First Union Lending is here to help. If you need a loan to help build up your credit score, don't hesitate to call!