There are many ways to build a high credit score.
But not all of them are effective.
If you’re looking for better options to help skyrocket your credit score, then this will be the most important article you’ll read today.
And here’s why…
In this blog, you’ll learn one simple and yet very effective way not many people know about to raise and improve your credit scores.
I’ll tell you what this way is in a second…but first let me tell you why you should pay attention to what I have to say in this article;
With my 25 years of experience as a financial coach and bank expert, below, I’ll also show you a few more options for building credit to help quickly get that new phone you’ve been wanting or finally get a vacation you’ve deserved.
A high credit score can be the key that unlocks the car you’re planning to buy.
It can also help you buy the house of your dreams.
One of the exceptional ways that we can make our score stronger is by getting a credit-builder loan.
What’s a Credit-Builder Loan?
Nowadays, consistently paying on time and paying down debts are not the only ways to help improve credit.
For instance, credit-builder loans are a great way to build credit fast.
It’s also great for people who are just starting their credit journey since this loan usually doesn’t require credit histories.
A credit-builder loan is specifically designed to help you build credit by repaying it consistently.
Payment history makes up about 35% of your FICO credit scores.
Making regular, on-time payments is crucial to show lenders you’re a reliable borrower.
However, remember that missing payments (even one missed payment) can ruin your hard work.
Late payments can drastically lower your credit scores. You’ll see a change on your credit report after 30 days, and it can stay there for seven years.
When you choose to get a credit builder loan, the lender will open an account in your name, where he will deposit your approved loan amount and report your payments to the credit bureaus.
This type of loan is an installment plan with fixed monthly payments.
It also typically has low spending limits, and you should expect higher interest rates than normal.
Starting entrepreneurs who have poor credit or no credit history can benefit from a credit-builder loan as it helps you establish a record of a responsible and trustworthy individual who’s capable of repaying debts.
How Does a Credit-Builder Loan Work?
In a credit builder loan, instead of receiving a single payment from your lender that you’ll have to repay over time like in a traditional personal loan, the lenders will put a side certain amount of their own money into a savings account.
Then, you’ll have to pay that account in monthly installments, and at the end of the loan term, you’ll be able to access the balance.
Credit-builder loans work similarly to a secured card.
To become less risky to lenders, credit-builder loans require you to save money in the back as collateral, so you must save up the money before even having access to it.
How can a credit-builder loan help build credit?
Credit-builder loans help boost credit scores since lenders usually report your payment history to the credit bureaus (Experian, Equifax, and TransUnion).
With a credit-builder loan, you’ll also build savings you didn’t have before.
A credit-builder loan allows you to show that you can handle repaying bills consistently and on time.
Keep in mind, that this will not work if you continue to miss payments or pay way after due dates.
Credit-builder loans are best suited for individuals who don’t have accounts yet or people with poor to fair credit scores.
It can also help people with poor to fair credit scores, get to a “good” credit score range.
Here’s a quick look at how FICO’s credit score range works:
Credit Score Ranges
- Poor: 300-579.
- Fair: 580-669.
- Good: 670-739.
- Very good: 740-799.
- Exceptional: 800-850.
As you can see above, credit scores in the 670 and above range are considered good.
A good credit score opens up many opportunities for better loan terms and lower interest rates.
An excellent credit score can make your dream house or much-needed car possible to attain.
It can also give you access to countless credit card rewards, special perks, cashback, and many more advantages.
How to Get a Credit-Builder Loan
Fortunately, getting a credit-builder loan is easier than getting most types of credit because you don’t have to undergo a traditional credit check when applying.
In a credit-builder loan, potential lenders won’t use your credit scores as a basis for approval. Instead, they might use your banking history to decide whether you’re approved for a loan.
A few requirements you’ll need when applying for a credit-builder loan:
- Employment data
- Pretax monthly income
- Proof of income
- Tax returns as proof of income (If Self-Employed)
- Housing payment
- Loan Balances
- Checking Account Balances
- Savings Account Balances
You can check out credit-builder loans in the following institutions:
Credit Unions
Many credit unions offer this type of loan. To see more options, visit your local credit union’s website.
You’ll most likely be required to become a member to get a loan.
Membership fees usually range from $5 to $25, or you can donate to a partner charity.
Your qualification for the loan is based on your job information.
Community Banks
Your local banks can also offer credit-builder loans.
Similarly to credit unions, these banks may have a goal of financial education.
Research community banks near you and ask about the best and most suitable loans.
Online Lenders
In this day and age, you can also look for loans online.
A quick online search can give you thousands of online lenders.
However, keep in mind that not every lender is licensed in every state, so better check first.
Also, the payments, interest rates, loan terms, and APRs will vary depending on the lender.
Lending Circles
Family or friend groups can help each other boost credit with lending circles.
Lending circles offer interest-free loans, which a community organization typically facilitates.
This group will now decide on a monthly payment and loan balance, with each member paying the same amount monthly.
Every month, a member will receive a loan in the agreed-upon amount.
Monthly payments will be reported to the credit bureaus, helping improve your credit scores.
Additional tip: Before applying for any kind of credit-builder loan, you must first research and find out whether your potential lender reports to all three credit bureaus. Experian, Equifax, and TransUnion, since not all lenders do.
Lenders reporting your good credit behavior will help strengthen your credit, giving you better loans and lower interest rates.
Alternative Ways To Help Boost Credit
Credit-builder loans are not the only way to improve credit. There are still various things you can do to help boost your credit scores. Here are a few tips:
Get a secured credit card
Getting a secured credit card is also one of the easiest ways to help boost credit scores.
When you get a secured credit card, you’ll require a cash deposit, which will also become your credit limit.
Using a secured credit card is just like using a normal credit card. But with a secured card, your deposit protects the issuer from default.
Using a secured or traditional credit card responsibly can help quickly improve credit scores.
Monitor Your Credit Report
Did you know that errors on your credit report can cause your credit scores to drop?
That’s why it’s also important to monitor your credit report.
Check for inaccuracies or signs of fraud and report it to the credit bureaus immediately.
Check out AnnualCreditReport.com to get free copies of your credit reports.
On the other hand, if you want to keep track of your credit scores, you can check them on your credit card or loan statement, choose free credit scoring sites, or purchase them directly from major credit bureaus like FICO and VantageScore.
Maintain a Low Utilization Rate
A good rule of thumb is to keep your credit utilization at 30% or lower.
The utilization ratio is how much of your credit limit you’re using.
For example, if you have a credit card limit of $3,000 and spend $1,800 this month, your credit card issuer will report that to the credit bureaus.
Even though you’ll be paying it all off next week, your credit utilization ratio is still 60%, making it one of the most common mistakes that lower people’s credit scores.
Lenders or banks like to see that you have lots of available credit and you’re not spending much of it.
Spending way above your ratio puts you at a high risk of being unable to repay your debt.
Limit your card usage, especially if you have a low credit limit, to maintain a low utilization rate.
Becoming an authorized user
Joining a trusted family member’s or a close friend’s credit card account as an authorized user can also help improve your credit score quickly.
You’ll use this card to make usual buys, and the card’s payment history will appear on your report.
However, your credit score may also be damaged if the card’s main owner does not pay his/her bills on time.
What’s A Credit-Builder Loan: Final Thoughts
Credit-builder loans are one of the best tools when trying to build or rebuild credit.
If you plan to get a credit-builder loan, you can check out credit unions, community banks, online lenders, or lending circles.
Be open to other ways since a credit builder loan is not the only tool you can use to help boost your credit score.
You can be an authorized user on someone else’s card or maybe try to get a secured card.