How is your credit? Do you have a significant and positive history, or are you trying to build your score from scratch? Have you had some turbulent years and are now wanting to reestablish your creditworthiness? Regardless of your current situation, there are several ways to rebuild or establish credit. Some of the more traditional methods for building credit require taking out loans with a co-signer, getting a secured credit card or even becoming an authorized user on someone else’s credit card. However, another less talked about method is through the use of credit builder loans.
How Do These Loans Work?
Credit builder loans are considered low risk to the lender and have a limited range, typically between $500 and $1,000. A pure credit builder loan places the money into a certificate of deposit or a savings account, which you cannot access until the loan is paid. Therefore, these loans are developed to create a history of on-time payments, and not for the benefit of funds. As you make on-time payments, the lender will report the positive activity to the credit bureaus, which should increase your credit score over time.
Who Should Get a Credit Builder Loan?
While these loans may not be right for everyone, there are several situations where such a loan may be beneficial. For example, if you do not have a significant credit history, this financial approach can help to build a positive payment history. Also, if you are trying to rebuild after a financial crisis, such as bankruptcy, then credit builder programs can help to improve your score, possibly securing better interest rates for significant purchases and investments. However, these loans can also be a good option for individuals who do not want additional credit cards, or who want to secure better rates on home or car purchases.
Where Do You Apply for Such a Loan?
Unfortunately, not every financial institution offers credit builder loans; in fact, most traditional big-name banks do not. However, there are some credit unions and even nonprofits that will provide access to these loan services. Although, if you are seriously considering one of these loans, you are likely better off searching for online lenders who specialize in the service, even those companies focused on rebuilding credit may offer fair loan agreements.
Is a Credit Check Necessary?
As these loans are considered low-risk for the lenders, a credit check may not be required. However, you will need to supply the lender with accurate income information, proving that you are capable of making the payments. While most lenders will not require a credit check, it is impossible to state whether all lenders, especially more conventional institutions, have the same requirements for loan access.
What Are the Potential Negatives of a Credit Builder Loan?
The potential negatives for a credit builder loan are essentially the same for any other loan program. You want to make sure that you only take out a loan if you can afford the payments. These loans, while relatively secure for the lender, still come with a risk for borrowers. If you fail to make on-time payments, then these loans can still have a negative effect on your credit report. Therefore, before choosing this type of loan, make sure you can afford the payments and that you are prepared to follow the payment schedule.
Are There Other Ways to Rebuild Credit?
While a credit builder loan is an excellent way to demonstrate and establish a positive payment history, it is not the only way to rebuild your credit. You can also secure a conventional loan with a cosigner, ask a family member or friend to add you as an authorized user on their credit card or apply for a secured credit card. Although, you can also dive deeper into the idea of authorized users with tradelines, which can place a credit card in good standing and history on your report, boosting your score quickly.
How is your credit? Are you trying to rebuild your score or establish it? While a credit builder loan may be a good fit for your situation, do not jump into the loan without considering all other available options. If you would like to discuss your situation and your available options, then contact Coast Tradelines.