Can Credit Loans Really Help You Build Credit?

When you have no credit history or your credit score is low, common sense says to take out a loan. With a new loan, you should to be able to make payments and improve your score over time, right? Unfortunately, this perspective often causes us to become overwhelmed when it’s time to start a new business.

Secured credit cards have long been a good solution for consumers who need to improve their credit but can not get loan approval. With a secured credit card, you deposit a cash deposit as collateral and have access to a credit line with which you can borrow. Your credit card payments refer to the three credit bureaus and as a result, you have the opportunity to improve your credit score over time.

Interestingly, another type of bad credit loan product has made its way into the market over the last decade. Credit cards work similarly to secured credit cards, as they allow consumers to secure their own loan and make monthly payments to credit bureaus. But do credit cards really help?

A closer look at credit loans

According to Michael Broughton, CEO & Founder Credit PerchHelping Consumers Build Credit Using Their Rent Payments Credit loans can absolutely help consumers improve their credit scores.

Get Credit Loans Or “Credit Building Savings Accounts” From Self, for example. With yourself, you apply for a credit creation account, agree to monthly payments and finally repay the amount you agree. In addition, you get all the money you paid at the end, minus any charges.

“These types of loans help build credit because the lender will report each of your successful payments to the three major credit bureaus,” says Broughton. “Since the biggest impact on your credit score is your payment history, over time the payments you make on these credit cards will increase your credit score.”

A credit card loan can also be a great way to start your credit journey if you have little or no other credit history, he says.

Adem Selita, CEO & Co-Founder The Debt Relief Company says the good thing about credit card loans is that you can apply for a very low credit line loan with low monthly payments. Since Self accounts come with monthly payments of up to $ 25, this means that most people can afford to create credit this way.

From there, payments on a credit card will offset the negative impact of any missed or delayed payments you have made in the past. Also, the act of repaying the loan on time will provide another case in which you are showing financial responsibility, which shows that you are running a good credit risk.

Even the Office of Consumer Financial Protection (CFPB) agrees that credit creation loans can be a benefit to consumers who need to create credit. According to a CFPB report, those who applied for a non-existent loan increased their chances of getting a good credit score by 24%. Not only that, but participants who took out a debt-free loan also saw their credit scores rise by 60 points more than participants who had an existing credit history and debt.

In addition, credit loans act as a mandatory savings account. Based on this fact, users with CFPB profiles reported that they increased their savings balance by an average of $ 253.

Credit Builder Loans: What To Look Out For

For the most part, credit cards are fairly straightforward and dry. You agree to pay a certain amount each month and the company providing the “loan” stores this money for you in an account. They report your monthly payments to the credit bureaus and, over time, your rating increases. In the end, you will be rewarded with the money you paid into the account during the loan period.

So what is fishing?

Broughton points out that while a credit card can actually generate credit over time, it does cost the borrower something. Take for example credit loans from Self. This provider is very transparent about the cost of its product, however their numbers still show that nothing is free.

With Self, you could agree to pay $ 48 a month and a $ 9 deposit to start your account. From there, you would pay $ 48 a month for 12 months. At the end of that year, you would get back $ 539 – or $ 46 less than you paid.

Another company in this area, CreditStrong, offers a similar fee structure. In their website example, you pay a $ 8.95 advance management fee to start your account. From there, anywhere from 88% to 98% of your payment is applied to your account each month, with the remainder going into charges.

This is not a lot of money to lose to build your credit, but it is worth noting.

Another “gotcha” with credit cards is the fact that they may not work in your favor if you skip a brief update. If you are making late payments on your credit card loan, these are also listed on the credit bureaus.

This means that instead of improving your credit score on time, late payments on a credit card can actually make your credit score worse than it really is. And if you started your credit line because you did not have a credit history, you would definitely start your credit crunch on the wrong foot.

This is why lending loans should only be used by people who are serious about their credit goals and are ready to commit. James Garvey, CEO and co-founder of Self, says loan products like Self can be a great entry-level tool for someone who wants to build credit from scratch or after financial difficulties. Ultimately, you have the opportunity to build positive credit habits while working on goals such as buying a home or paying for college.

“Like any tool, however, to help loans grow, you need to use them responsibly,” he says.

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