Having no credit history or a colorful credit history can seriously hamper your chances of securing a loan when you really need one. There are many ways to build a good credit score so that when the need arises you will get a line of credit easily. One popular method of building a strong credit score is by applying for a credit builder loan.
What is a Credit Builder Loan?
A Credit Builder Loan, also known as “Fresh Start Loans” or “Starting Over Loans” is something like training wheels for credit. These loans are specially designed for people with a no credit history or a poor credit score. When you apply for a Credit Builder Loan the lender or bank sends the loan amount to a third party for it to hold. As you pay off the loan through installments the bank authorizes the third party to release the loan to your account.
Credit Builder Loans are usually offered by small financial institutions like credit unions or community banks. These loans do not require you to have any credit history or even a strong credit history, as the loan amount is only released to you after payment of the loan.
How Do Credit Builder Loans Boost your Credit Score?
Credit Builder Loans, as the name suggests, are purpose-built loans to help you boost your credit score. If you make timely payment on these loans you will gradually see your credit score get stronger. When you make payments on these loans, the payments are reported to the three main credit bureaus, TransUnion, Experian and Equifax. These three credit bureaus give the highest weights to timely repayments, thereby, giving your credit score a massive boost.
Applying for and Managing a Credit Builder Loan
Find the Right Credit Builder Loan
While looking for a Credit Builder Loan make sure you apply for one that fits comfortably within your budget. Taking a large Credit Builder Loan and stretching your budget will not reflect well and will increase the risk of you defaulting on a payment. It would be prudent to take a small to medium size loan for a term no longer than 24 months.
Get it Approved
Once your Credit Builder Loan is approved it will be deposited to a savings account that you will not be able to access until you have fully paid off the principal and interest amounts. This is the safety measure the lender takes as you do not have a credit score or have a colorful credit history.
Ensure Timely Payments
As long as you make payments on your Credit Builder Loan on time, the lender will give the credit bureaus a good credit report on your behalf. But if you miss a payment by more than 30 days, it will reflect negatively on your credit report, so ensure you’re disciplined about your payments.
Check your Credit Score
While making payments on your Credit Builder Loan keep a track of your credit score. Companies like ClearScore provide you credit score free of charge, don’t stress about small fluctuations in your score look at the overall trend.
Collect the Loan Amount
Once you are done paying off your Credit Builder Loan it will be credited to your account. Ensure you have received the entire amount plus interest at the end of the loan tenure.
Who Gives Credit Builder Loans?
Credit Unions are a form of co-operative formed by a group of people who have a common bond. This bond could be a community, labor union, church, industry, etc. Credit Unions are not-for-profit unions and require you to be a member to access their services. The membership criteria for these unions usually requires you to share that common bond with the member of the credit union, as a lot of the transactions run are based on a matter of trust.
In the United Kingdom, credit unions are regulated by the Financial Conduct Authority (FCA), thereby, falling under the purview of the Financial Services Compensation Scheme (FSCS) as well. The FSCS secures the first £85,000 held by each member within the credit union. Credit union do, from time to time, offer their member Credit Builder Loans to help members secure larger loans in the future.
Community Development Financial Institutions (CDFIs)
CDFIs are developed to help cater to under-served individuals and communities. These organizations operate independently and are aimed towards enterprises and individuals that have been unable to secure loans or other lines of credit through traditional financial institutions. CDFIs offer loan finance, equity investment or both. In some cases, where an enterprise or individual is looking to secure a large amount of credit they offer Credit Builder Loans to help them boost their credit score to secure a good line of credit in the future.
Banks and Online Lenders
There are a number of banks and online lenders like Self and Republic Bank that offer their customers Credit Builder Loans. Applying for them is pretty simple, you just need to provide some basic details like your name, address, date of birth, income, etc, and in no time your Credit Builder Loan will be approved. When you take a credit builder loan with some of these organizations the loan amount is put against a Certificate of Deposit (COD) which collects interest as you make payments on the loan.
Lending Circles are a great option to be used among family and friends. The Lending Circles program which is run by the non-profit Mission Asset Fund is a good way to build credit. In a Lending Circle, about 10 participants come together and pool a certain amount of their funds and lend this amount to one of the members, this practice goes about in a round-robin fashion through the circle until each member has received the money. Repayments in these Lending Circles are reported to the credit bureaus and can help boost the members’ credit score drastically.