Having a good credit score is important, especially in today’s COVID-addled economy. But improving your credit score isn’t always easy. One option that seems to be growing in popularity is something called a Credit-Builder Loan.
Improving your credit score can traditionally take years, as you build a solid history and allow any negative remarks to age out of your credit report. Credit-Builder Loans help speed up that process by allowing you to actively build your credit. In fact, the sole purpose of the loan is to help you increase your credit score. It’s functionally the opposite of a regular loan, where you receive a lump sum of money and pay it back to the lender in installments. With a Credit-Builder Loan, you pay installments to the lender and receive the money at the end of the loan term. During the loan period, the lender keeps your payments in a savings account and reports them to credit bureaus to help build your credit.
Because these loans carry very little risk for the lender, they’re generally available to people who have no credit or bad credit. And while it may sound like you’re just setting aside your own money into a short-term savings account, many Credit-Builder Loans can carry fees or interest rates.
If that sounds like something you could use, here’s how to go about getting one:
Step 1: Check Your Current Credit Score
Even though Credit-Builder Loans are pretty widely available (especially in comparison to traditional loans), they’re not guaranteed. The lender will likely review your credit reports and scores before approving you for a loan, and you should check them for yourself as well. There are plenty of free credit report options out there, and you can always review your findings with a qualified accountant to see if your situation is right for a Credit-Builder Loan—after all, no two financial situations are exactly alike.
Step 2: Find a Lender
Credit-Builder Loans are generally not available from national banks, so you’ll have to rely on smaller lenders. This includes credit unions, lending circles, and independent or regional banks. While you compare available lenders, be sure to look at interest rates, account fees and penalties, and other costs. You’ll also want to take note of what sort of paperwork each lender requires from you. Choose a lender that reports to the three main credit rating agencies—S&P Global Ratings, Moody’s, and Fitch Group.
Step 3: Collect Your Paperwork
You’re going to need to provide paperwork to get your loan. Every lender will have their own requirements, but you’ll typically need some combination of:
- Proof of income, such as pay stubs or tax returns
- A bank account and routing number
- Your Social Security number
- A valid U.S. address and phone number
- Some form of photo ID
When you pick your lender, Get these documents together so you’re ready to go.
Step 4: Review Terms and Conditions
You have your lender, you have all your paperwork together, and you’re ready to get started building your credit… but before you sign anything, take the time to review all the terms and conditions of your loan. Make sure there are no hidden surprises in there for you, and take note of any grace periods (time before you have to start making payments) and prepayment penalties (invoked if you pay off the loan ahead of schedule). As with any financial move, make sure you know what you’re doing before you do it!
5. Apply for the Loan
Once you’ve double-checked the conditions, you’re ready to apply for your loan and start making payments. Applications are often online (especially these days) and approval can happen in just minutes. From here you only have one more thing to worry about—making your payments on time. Missing just a single payment could undo all of your hard work in building your credit score!
Credit-Builder Loans are a great way to build or rehab a credit score, if they’re done correctly. If you think a Credit-Builder Loan sounds like the right thing for you, we invite you to schedule a little time with a qualified advisor so we can help you prepare and get started.