If you have never established credit before, or you are recovering from bad credit, there are ways to help build or rebuild your credit. If you are unable to get approved for a personal installment loan, one great option is a credit builder loan. Consumers seeking a credit building loan to rebuild or build a stronger credit profile, usually have a larger goal in mind. Whether your goal is getting an unsecured credit card, buy a new car or even purchase a home a credit builder loan is a great place to start.
Credit Builder Loans
A Credit builder loan is particularly offered by credit unions and a few banks, they are typically offered in modest amounts, ranging from $500 to $1500. Many credit unions and banks certain requirements you must meet before they approve the loan. For example, they may require you to be a member for X amount of years, have been employed at the same job for six months, and reside at the same location for six months to a year.
Each Credit Union or Bank offer different Structures
Credit Unions or banks may offer a different type of credit building loans and can vary in interest rates. Here are a few examples of the different types:
- A loan secured by loan funds: This type of loan is when the lender puts the loan amount in a locked savings account and gives it to the borrower after the final payment has been received. This type of credit building loan is safe and secure for both the lender and the borrower, and the major advantage is the borrower doesn’t need to come up with a lump sum payment to start building credit.
- Secured Loan: This is when a consumer gives a lump sum amount of money to the lender using it as collateral for a loan. The lender typically puts the lump sum in a secured savings account or a certificate of deposit. The collateral is frozen and the funds are released incrementally as the loan is paid down. The interest rates are typically lower on a secured loan, but the major disadvantage is coming up with a large amount to use as collateral.
How A Credit Builder Loan Can Help
If you are starting fresh and do not have credit a crediting building loan will take time to build on your credit profile. Once the loan starts reporting on with the credit bureaus it may take up to six months before you start seeing an increase in your FICO Score. FICO needs enough information on your credit file to determine your creditworthiness. Making your payments on time and in full will help build a strong credit profile. Depending on your history you may see your score go from zero to 600’s and in some cases 700’s.
If you had bad credit and are trying to reestablish your credit, it will be important that you remain current and on time on any previous obligations, you may have had. You will also want to make sure everything on your report is reporting accurate and is verifiable. A Credit building loan can help you increase your score by 20 to 25 points over the life of the loan.
A small increase in points can help you go from poor to fair, or fair to good. Credit Builder Loans can help move from a risky borrower to a less risky tier.