If your credit is low or no credit, you may not be eligible for the types of accounts (credit cards, personal loans, etc.) that could help you develop it. This is one of the many frustrations of the The United States Credit System, but there are a few quiet ways to improve it.
One of them is rightly called a “credit builder” loan. These small installment loans are usually offered by credit unions and some banks, and they can help boost your score a bit if you make payments on time.
How it works
According to Nerdwallet, you may also see lending institution loans advertised as “fresh start loans” or “start over loans”. To withdraw one, you will need to prove that you have enough income to make your payments on time. For a “pure” secured loan, the credit union holds the amount you borrow, typically $ 500 to $ 1,500, per Credit Cards.comAllie Johnson’s — Frozen in a savings account, then you make payments every month, which are reported to Equifax, Experian and Transunion, the three major credit bureaus.
When it’s fully repaid, you also get accrued interest. This is what sets it apart from other types of loans, says Greg McBride, The bank ratechief financial analyst of. This is also why it is not available at all financial institutions – credit unions offer it as a service to their members.
There is also an unsecured version, which gives you a small amount of money up front, usually for an unforeseen expense, and you pay it back with an automatic funds transfer. These can be a good alternative to payday loans, writes Johnson.
Payment history is the most important component of your FICO credit score, which means reported on-time payments could help boost your score, although of course there’s no magic bullet that will take you from, say, 550 to 750. ” If you are recovering from bankruptcy or a series of delinquencies, it is a step in the right direction but it is not a panacea, ”says McBride.
Another important factor is your credit mix, which accounts for 10 percent of your FICO score. Adding an installment loan can help you with this if you only have one credit card, for example.
What to look for
If you decide this makes sense to you, you’ll want to do your homework. You don’t want to burn yourself out too much – taking a considerably larger loan amount isn’t worth more to the credit bureaus than a smaller, more manageable amount – and you want the term to be no more than 24 months, for example. Nerdwallet.
So make sure you know all the details before signing up. “Get details on any loan you are considering, including how it works, whether you need to post collateral, the interest rate, the monthly payment amount, and whether payments are reported promptly to the three credit bureaus,” Johnson writes. .
Again, if you can’t pay off the loan on time (within 30 days of its maturity), you could hurt your credit even more. So it’s only something you want to do if you are sure you can pay it off on time.
But also remember that you don’t want to rush the payment. Building credit takes time, that’s the interest of the loan. So, if it is a 12 month loan, be aware that you have to make payments for 12 months for it to be most effective, even if you have the capacity to pay it off sooner. If you need a quick credit solution, this isn’t for you.
Other ways to accumulate credit
If this sounds complicated, here are three more ways to build your credit:
- Pay off overdue accounts: Collections amounts will not be deleted immediately upon refund, but a refunded invoice is viewed more favorably than an overdue invoice. And be sure to check your score for errors or black marks that can be removed.
- Apply for a secure credit card: “As long as you pay off the balance in full each month, you don’t have to worry about interest charges,” says McBride. “But stay away from those with large application fees and annual fees.”
- Become an authorized user on a family member’s card: But remember, you are both responsible for the payments and both of your credit scores will be affected.
But if none of that works, there might be some recourse in a credit builder loan, especially if you are young and have no credit at all. Again, make sure you have the funds to pay it off on time, otherwise it will do more harm than good.
“This is a good option if you are in a situation where you are looking to build or rebuild your credit,” says McBride. “If the shoe fits, wear it.”