Creating a credit history is not as simple as securing a contract loan and repaying it. Sometimes it is difficult for consumers – such as newly divorced, recent graduates or new immigrants – to have enough credit to get a loan or open a credit card.
Crediting loans can be an ideal way for someone who does not have a credit history to start building one. There are approximately 26 million adults in the United States in this “credit invisible” state. Credit loans give borrowers a chance to show that they can make regular payments, whether they are building or rebuilding their credit line.
If you are successfully using a credit card, you may be able to improve your credit history and, consequently, your credit score. This could help you qualify for bigger loans over longer periods of time and get unsecured credit cards.
How does a credit card work?
Credit loans are different from other loans because the financial institution requires you to make payments before you receive the full amount of the loan. This is in contrast to a standard loan with installments that gives you the loan funds instantly, which you repay over a period of time.
“You do not need money, you need better credit scoreSays Michael Emancipator, vice president and regulator at Independent Community Bankers of America.
At the beginning of the loan process, the lender will transfer his money to a locked account, and then you start making regular payments. Depending on the arrangement, the lender may provide some of the money after the payments start or wait to give you the loan until the payments are completed.
“The customer does not have access to the money, but will make amortized payments over a period of 12 months or whatever period they choose, along with interest,” says Emancipator. “In the end, they can access the money.”
Loans are offered in various amounts, payment periods and interest rates:
- Amounts generally range from about $ 300 to $ 1,000.
- Payment periods are usually from six months to two years.
- The money is deposited in your savings account.
“It’s a training loan – so easy to get, easy to repay,” said John Ulzheimer, president of The Ulzheimer Group and a national credit specialist who has worked with Equifax and FICO in the past. “Unless you’re really tied up, really irresponsible, it should work perfectly.”
A word of caution: A home loan is not going to have as much impact on the credit score for a customer restructuring credit as it would for a first time borrower. However, says Jordan van Rijn, a former senior economist at the National Credit Union, can help.
What To Look For In A Credit Making Loan
Before you take out a credit line, make sure the lender mentions your payments in all three credit bureaus – TransUnion, Equifax and Experian. Since lenders will often consult only one credit bureau while taking out a loan, it is important to cover all three.
You should also make sure that you comply with the terms of the loan, especially the amount of the monthly payment and the duration of the loan. If you are not able to make the payments on time, the benefits you were hoping to receive from the credit line could be reduced or completely eliminated.
What are the Credit-Builder loan requirements?
A lender can offer a mortgage loan as an option if you are trying to build credit or if you are trying to recover credit after a major problem such as bankruptcy.
Once you get something positive in your credit report, “it changes the way lenders and service providers see you,” says Ulzheimer.
For example, recent college graduates who have not yet obtained credit cards may be more likely to rent an apartment or obtain a cell phone account thanks to the positive credit history achieved through a credit building loan.
There are few credit requirements for this type of loan. You just need to:
- Show that you have a source of income that allows you to make payments of about $ 50 to $ 100 each month for the duration of the loan.
- There should be no unresolved financial crises.
If you have financial crises against you, “We would usually advise people to pay for them first,” says van Rijn.
Where to Get a Credit-Builder Loan
It is very likely that you will get a loan from a community bank, credit union or online lender.
Credit loans are not a big source of profit, which is why some financial institutions do not offer them. However, some local banks and credit unions rely on these low-risk products to lead customers to more traditional lending vehicles, such as car loans and mortgages.
“You will not necessarily see customers going to a bank asking for this particular product,” says Emancipator. “But it can turn from a banker to a customer who is having financial difficulties or who does not have a credit score to go for a more traditional product.”
There are about 5,300 credit unions across the country, and about a quarter of them offer some form of credit to build credit, says van Rijn. In total, almost half of the members of the credit union nationwide have access to loans. Although you have to be a member to get a loan from a credit union, it is quite simple to become a member. Just look for a location nearby and see what the requirements are, says van Rijn.
Alternatively, you can look up online credit line loans to see which lenders offer them. It can also be a lender that has a presence somewhere in the US but trades in online loans.
Other ways to build credit
Taking out a credit line is not the only way to build your credit and improve your rating. You can also:
- Open a secured credit card. Unlike more formal uninsured Credit cards, insured cards, require you to make a deposit – which is usually your credit limit – before you can use the card. Unlike credit cards, you can get instant access to funds. Make your monthly payments and pay the full balance to avoid interest accruals.
- Become one authorized user. With some credit cards, the primary cardholder may add an authorized user to the account. The principal cardholder is still responsible for the debt, but the authorized user can benefit from having a credit card account in their credit history. When this strategy is managed properly, it is a good way to build credit.
- Get help from a co-signer. If you can not get a loan, co-sign with a good to excellent credit may be able to help. A co-signer can assure the lender that someone will make the payments, whether it is you or the co-signer. This is a solution that parents can choose if they want to buy a car for a child who is a college student and does not yet have a job. Once the children start working, they can make payments.
- Join a lending cycle. This type of lending arrangement has been around for many years in a variety of cultures, where team members lend money to each other. Joining a lending circle can help your credit history and rating if the organization that runs the circle is listed in the three credit bureaus.
Crediting loans can be a good option for improving your credit history, but there is no guarantee of success. You need to show that you take the credit seriously and the best way to do this is to make the payments on time.