For many Americans, our credit score isn’t quite what we want it to be. Whether it was down to factors that were out of our control or one small mistake, the end result doesn’t matter. Credit is always dealt with in black and white, and no amount of grey that we try to introduce will make a difference.
Get Started Building Your Credit
A low credit score can be debilitating in a lot of ways. If yours is less than stellar, then you will know the impact it can have. We’re not going to hash out all the downsides here. The focus of this article is to look forward and show you the definitive guide to rebuilding your credit with a loan.
What is a Credit Score?
Your credit score is based on your credit history. If you’ve never used any form of credit, then you will have no credit history and therefore have no credit score. Making it difficult to obtain financing from banks or other lenders.
Good credit history is built up over time. For many, the first form of credit a borrower obtains is a secured credit card from their bank. They will have a specific credit limit on the card, which is the amount that the bank will allow them to borrow at any given moment.
Once a month, the bank will issue a statement indicating the amount that needs to be paid back. Making these payments in full and on time every month is a sure way to improve your credit score.
This is a slow process, though. It’s also a process that is not available to everyone – some financial institutions will not extend credit to individuals whose credit score don’t meet specific criteria. Or even if they are willing, it may be at a high interest rate.
So, many of you will probably be wondering if there is a better, quicker alternative that is open to anyone?
What a Credit Builder Loan Is
This is where we introduce the concept of a “credit-builder loan” (henceforth referred to as a CBL). A CBL is essentially a small loan that helps you build credit. It’s different than a bad credit personal loan, which is not a payday loan. With a CBL, the principal of the loan (the amount that you borrow) is held in a bank account, and you make periodic payments to the bank until the loan is fully paid off, at which point the principal amount is yours.
Don’t be surprised if you haven’t heard of these before. These loans are often not widely advertised and are mostly offered by smaller financial institutions. If you only have an account with one of the major banks, it may be worth doing some research on credit unions and smaller banks that offer CBL’s.
Research Your Credit Builder Loan Options
The first step in our guide is to make a shortlist of your CBL options. As we mentioned, many of these are not advertised to a great extent, so you will have to use all of your expertise as an online researcher.
Once you have created your shortlist, be objective in making comparisons between them. Do not just go for the one with the flashiest website. You’ll want to check all the terms and conditions and ensure that there are no hidden fees or limitations.
How to Apply for Credit Builder Loans
The next step is to apply for the CBL. You will want to make sure you set a payment level which you can easily afford – there is no benefit to trying to be a hero here. The entire purpose of this exercise is to improve your credit score, you are not awarded extra points for setting unobtainable goals. If you miss a payment, then your efforts will be fruitless.
After you have been approved for the loan, the loan amount will be transferred to a savings account in your name. The critical difference here between a conventional loan and a CBL is that you will not be able to touch this cash until you have made all of your payments. This is referred to as a secured loan. This is the security that the bank requires to provide credit to an individual with either no, or a weak, credit history.
Make Your Payments on Time
The next step is perhaps the most important – make your payments on time and in full, every month. Do whatever you need to do to build this into your routine. For some people it requires setting calendar reminders on their phone, other people are old fashioned and put sticky notes up on their fridge. No matter the method you use to remind yourself, just make sure you never make a late payment.
As you continue to uphold the terms of the loan agreement, your lender will periodically send reports to the credit bureaus indicating that you have made on-time payments. This is when you will start to see the benefits of the scheme.
The movements may not be massive on a week to week basis, but from this point onwards you will start to see a positive trend in your credit score. And, come the end of the term of your CBL, the entire principal of the loan will then be available to you to spend as you see fit.
Many Americans will not be aware of how a secured loan can help you to rebuild your credit. After reading this guide, you’ll have the confidence to start researching loans that will help build your credit and begin the process of getting your credit score to what you want it to be.