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If you are low on your credit score or have no credit history, you may be eligible for a credit builder loan. These do not require a minimum score to be approved and have proven to be very good at increasing credit points for those new to credit. Read on and learn more about this tool:
What are credit builder loans?
This type of loan helps people build their credit scores. With these loans, you can’t access the amount you are approved for until you pay it off in full, including interest. As you repay, your lender will report your payment history to the major credit bureaus (Experian, TransUnion, and Equifax), which will raise your credit score by demonstrating on-time payments within the term of a loan. Generally, these loans are for small amounts of $1000 or less, so you will have small monthly payments in short periods of 6 to 24 months. Each lender will have different interest rates, so shop around to find the best one for you.
How much will it boost my score?
The truth is that for any loan to raise your score, it depends on how you manage it. If you pay your monthly bills on time, your lender will report this to the bureaus and have a positive impact on your score. Thirty-five percent of FICO (the commonly used score model) represents your payment history, so staying current will get you to the desired result. A CFPB report found that for participants without an existing loan, opening a Credit builder loan (CBL) increased their chances of improving their credit score by 24%. Also, participants with no debt showed an increase in their scores by 60 points more than participants with existing debt.
How else to improve your score
Loans to build credit are a good option, but not everyone is eligible for one. Since your credit score is limiting for many products, you will have to look for alternatives if you do not qualify.
*Meet Indigo Mastercard – This card is for people with low credit scores, and it will have different fees depending on your creditworthiness. Annual fees range from $0-99. This card does not require an initial deposit, so you can keep more money in your pocket while you build your credit. It is accepted in establishments that take Mastercard and has a 1% fee in international transactions. It does have a $300 credit limit which could raise your credit utilization rate and backfire. Get quickly pre-qualified (without affecting your credit score) and evaluate if this is a good option for you.
You can also opt for a secured credit card. These cards require an initial deposit to open the account, which your lender will keep as a cushion to cash out if you don’t pay your bill. These credit cards also report your activity and payment history to the credit bureaus so you can build your credit score just fine. Read here for our pick of the best secured credit cards.
Watch out for the following
Before acquiring a loan to build credit, make sure you will be able to repay it. Evaluate your income and see if a loan is something you can afford. If it is, you can make a payment plan where you map out how much you would be paying. Although these loans work to build credit, defaulting on payments will also be reported to the credit bureaus. If you have no credit history, late payments will make your first credit report backfire. With this information, do the math before acquiring any financial services to make sure that it will keep you financially stable.
