In the modern world, it is very important to have a good or excellent credit history, as it helps to get profitable and less expensive loan offers. For a good credit history, it is very important to make regular payments on the loan. However, what if you don't have a credit history yet or? How can you build good credit in order to qualify for great loan offers in the future?
What is a credit-builder loan?
A credit-builder loan is a type of loan designed to help people who have little or no credit history to get a loan offer. Surely you understand that good credit is very important as it increases your chances of getting big amounts, credit cards and good loan offers with favorable interest rates. The advantage of this loan offer is that you do not need to have good credit in order for your application to be approved. The main fact that affects the approval of the application is sufficient income so that you can make regular monthly payments.
This loan option is perfect for those new to lending such as young people, students or those who have recently moved from another country. Learn more about how credit building loans work before making a decision.
How does a credit builder loan work?
A credit building loan can have different names, so if you come across “fresh start loans” or something like that, it is the same as a traditional credit building loan. This type of funding is not widespread and is often offered by small financial institutions.
First, you need to choose a lender and fill out a simple form so that lenders can examine your details and decide whether to provide you with a loan. If you are approved, lenders will contact you to discuss the details of the loan and its repayment. Typically, credit building loans work as follows: the amount you borrow is kept in a bank account while you make regular monthly payments. Thus, you will not be able to access the money until you fully repay the loan. This is especially beneficial for the lender, as he compensates for runs the risk of providing you with a loan with no credit history.
When repaying this loan, it is especially important to make regular monthly payments as your payments are reported to the credit bureaus. Thus, your credit account is built from information in your credit reports. Reporting your payments will increase your credit score. Thus, if you decide to apply for a credit-building loan, be absolutely sure that you will be able to repay the loan, otherwise you will face a number of unwanted problems and your credit history deterioration.
How can a credit-builder loan help build good credit?
A credit-builder loan gives you the opportunity to show the lender that you can actually make regular monthly payments. Thus, your credit account is built from information in your credit reports. Reporting your payments will increase your credit score 100 points overnight.
It is very important to understand that a credit-builder loan will not work without your efforts. This loan will not help you get funding if you miss payments. Late payments are also reported to the credit bureaus, and they can significantly worsen your credit score.
Where can I find a credit-builder loan?
Of course, finding a credit-building loan can be difficult as it is not common, but it is important to understand where exactly you can get such a loan offer. You can always look for a credit building loan in your state, but below you can explore options worth considering:
- Credit unions and community banks. One of the options where you can get a credit building loan is a bank or credit union. However, credit unions often require membership requirements to be met. The advantage of credit unions is that they can offer the lowest interest rates you can find.
- Online lenders. Another good option for obtaining a loan is through online lenders. You can find different lenders on the Internet, however, please note that each of them offers different interest rates, loan conditions and repayment terms. Also note that not every lender offering credit-building loans is licensed in every state. Therefore, research the lenders that are available where you live.
- CDFIs. If your bank or credit union does not provide such loans, but you need to build credit, then you can try a Community Development Financial Institution. CDFIs are organizations that help lower-income communities.
How to manage a credit-builder loan?
Before applying, it is important to choose the type of loan that has an amount and interest that you can actually pay off. Also pay attention to loan repayment terms, which can vary. You should not choose the longest terms, as they will increase the chance that you will miss a payment or forget about it. Also, choose the exact loan that reports your payments to all 3 credit bureaus. What else to pay attention to?
- Make payments on time. As stated, timely payments are reflected in your credit reports and help you build good credit.
- Pay attention to your credit score. You can get a free credit score and keep track of your account.
- Take your loan seriously. Since this loan helps you to improve and build your credit, it is important to never forget about payments in order not to worsen your credit.