Credit improvement loans, sometimes known as ‘credit builder loans,’ are designed to help people that need to borrow money improve their credit score for the long term. These loans, designed for credit building, hold the amount you borrow in an account while you are making payments on the loan in question.
With a credit builder loan, the lender will hold the money in a savings-type account, also known as a Certificate of Deposit, which will be in the borrower’s name.
This type of loan is designed to help people with little or no credit history build a good credit, meaning that if you have needed to look for bad credit loans or even no credit check loans as a result of a poor credit score, by improving your credit score through credit building you may be able to borrow money in a more affordable way in the future.
Why Do I Need A Good Credit Score?
Your credit score determines the rate at which you will be able to borrow money. The better your credit score is the more likely you are to be able to borrow money and at a better interest rate. For example, if you have a better credit score, getting a $1000 loan will be easier and more straightforward than if you have a negative or bad credit score, which would indicate you are a risk for the lender to lend to.
Your credit score shows lenders how dependable you are and likely to repay the loan you are taking out.
Those who have not borrowed money before are not likely to have good credit score or much credit history. Credit improvement loans allow ‘credit invisibles’ to get on the credit score radar.
Who Should Use A Credit Builder Loan?
Credit builder loans are designed for those who have little to no credit, this makes them a great choice for credit newbies. Customers with existing debts can use a credit improvement loan or they are not likely to see as much benefit. Researchers found that credit scores of participants who did not have existing debt went up an average of 60 points more than those who had existing debt.
How Does A Credit Builder Loan Work?
Credit builder loans go by many names and are not always widely available. Credit improvement loans are generally offered by smaller financial institutions, like community banks and credit unions.
If you are approved for a credit builder loan, the amount you borrow will be held in a bank account while you make the repayments on it. Usually, you won’t be able to access the money you borrow until you’re fully repaid the loan. This means you won’t have instant access to the money you borrow but you can look at it as building up savings and credit at the same time.
Not being able to access the money you have borrowed acts as a safety net for lenders, lowering the risk for them lending to someone with no experience of credit.
While you are repaying your loan, your payments are reported to at least one credit bureau. This helps you to build a good credit score, assuming that you are repaying your loan on time.
How Should I Manage a Credit Improvement Loan?
There are few things to bear in mind if you’re considering a credit improvement loan. As with any loan and whenever you need to borrow money, you want to make sure that you understand exactly what you’re getting yourself into before you start, so research is key.
Here are a few tips to help you manage your credit builder loan:
- Only Borrow What You Need – Make sure that you borrow the right amount for you. Think carefully about how much you can afford to repay every month without stretching your budget beyond your means. Borrowing more than you can afford will only increase the risk of you missing a payment and damaging your credit score.
- Choose The Right Loan Term – If this is your first experience of borrowing money, don’t opt for a very long-term loan. Choose a manageable amount to borrow and don’t borrow for more than 24 months. This way you have the best chance of repaying your loan comfortably.
- Make your repayments on time, every time. The idea of a credit improvement loan is to do just that, improve your credit. Late payments can hurt your credit score and end up on your credit report. Make sure that you always repay on time.
- Decide How You Will Spend Your Loan – When you have fully repaid your loan, you will get the money you have borrowed. A credit improvement loan will allow you access to the money you’ve borrowed and improve your credit score, assuming you are making proper repayments. It is a good idea to think about how you plan to spend this money. It might be a good idea to keep it as an emergency fund, insulating you against any unexpected expenses.
- Monitor Your Credit Score – While you are repaying your credit improvement loan, it’s advisable to use a personal finance website to check your credit score for free. It is good to keep an eye on your credit score and watch for the overall trend, hopefully a positive one.