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Credit Builder Loans
If you have bad credit you are not alone. A recent survey indicated that over half of all Americans have credit scores that prevent them from getting access to good interest rates.
Additionally, many people cannot qualify for an automobile loan or mortgage due to their credit problems; a bad credit score could also affect your ability to rent an apartment or land a good job as well.
One of the methods that Americans use to improve their credit is by taking out a credit builder loan (or, CB loan).
Let’s take a look at credit builder loans, so you can see whether or not they are a good fit for your current financial situation.
What is a Credit Builder Loan?
A credit builder loan is a specific type of loan whose sole purpose is to help improve a borrower’s credit score. These types of loans are typically used by people with poor credit, or with little to no credit history. Lenders issuing these types of loans normally limit their risk exposure by depositing the loan balance in a savings account. The borrower then makes regular monthly payments towards the loan balance. Meanwhile, the lender reports successful payments to all of the credit bureaus on behalf of the borrower, which helps to improve the borrower’s credit rating. Once the borrower completes making all of the loan payments, he or she receives control of the deposited lump sum of the loan from the lender.
In most cases, these loans only consist of a few hundred dollars, so they are easy to pay off for most borrowers. Since CB loans are specifically designed for people with bad or no credit, you do not need to have a good credit score to be eligible for the loan; some lenders do not even do a credit check before issuing their credit builder loans. However, in most cases, the borrower will have to demonstrate that he or she has the income required to consistently make monthly loan payments.
Do Credit Builder Loans Work?
Credit builder loans can be helpful to improve credit in many cases. Making consistent payments to a lender as you repay the loan helps build your payment history, which constitutes about 35 percent of your credit score. However, if you are consistently late (over 30 days delinquent) on repaying your CB loan, or continue to make late payments on other bills, you won’t likely see any major improvements in your credit score; it may even get worse. Additionally, if you have other credit issues, such as excessive amounts of debt, a CB loan may not make much of a difference either.
Finally, in order to even qualify for a credit builder loan, you will have to demonstrate to the lender that you can make consistent payments over the life of the loan. If you are unemployed or expect to be, you may not even be eligible to take one of these loans out. In that case, you’ll need to consider other options to address your credit issues.
Where To Find Them
Credit Builder Loan Companies
If you do decide to take out a CB loan to improve your credit, you have many different options. You could choose to take advantage of one of the credit builder loan companies out there. Some of these companies, like Self, are online, and you can apply and be approved for a credit builder loan right from the comfort of your own home. Some of the more popular companies currently offering credit builder loan companies include:
Alternatives to credit builder loans:
If you are trying to improve your credit score, there are other ways to build it up beside taking out a credit building loan. Some of the most popular means people use to build up their credit include:
- Debt Consolidation Loans. A debt consolidation loan combines all your existing debts, such as credit cards, into a new single loan with a low-interest rate. Debt consolidation makes your debt more manageable, and easier to pay back, which can help you to better maintain a good payment history and pay down your overall debt. This can help you improve your credit score.
- Credit Counselors. If you have bad credit and runaway levels of debt, you should consider speaking to a credit counselor. Credit counselors can examine your debts and spending habits, and help you formulate a strategy to get your financial situation under control. In some cases, they will even interact with creditors on your behalf. Many credit counselors work for nonprofits and offer their services free of charge, too.
- Zero Interest Credit Cards. Many credit card companies offer zero interest promotions that enable you to receive a credit card that charges no interest for a limited promotional period (usually 12-18 months). If you qualify for one of these cards, you can transfer your outstanding debt balances to it, then pay them off during the promotional period interest-free. This can help build your credit back. However, ensure you pay back your debts before this period expires, or chances are the card will revert to charging you high levels of interest.
Building Credit With Loans: Parting Thoughts
Credit building loans can be a useful tool for improving your credit. If you’re worried about your credit score and how it may be holding you back from key life opportunities, such as buying your first home, you should check and see if a credit-building loan would work for you.
Build Credit History And Save Money With Self
No credit? Need to build credit? No problem.
You may also be interested in Plastiq – Pay Bills & Business Expenses Using Your Credit Card.