What You Need to Know About Credit Building Loans

What You Need to Know About Credit Building Loans

Updated October 6, 2020
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What You Need to Know About Credit Building Loans

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Credit building loans are a financial tool for consumers with little, no, or bad credit. They are an effective way to improve your credit score.

A healthy credit score is critical for living in today's world. A good credit score means you can get loans with good interest rates, rent an apartment, or apply for a new credit card.

What if you have no credit or bad credit?

Credit-building loans can position you to be in a strong financial situation.

What are Credit-Building Loans?

Your credit score is compiled by credit bureaus evaluating your ability to repay debts. Credit cards, loans, and utility bills all help increase this number.

You may find yourself drowning in debt or missing payments. These situations will drive a credit score down; lenders will view a low score as a high risk.

Credit-building loans help someone with no, little, or bad credit start making payments. These loans are only offered by local financial institutions.

The bank you take a credit-building loan from will hold the amount until you can make payments fulfilling the loan. Afterward, the institution will release the funds to you and your credit score will receive an increase.

Advantages vs. Disadvantages

There are extra advantages to using a credit-building loan besides the improved score. Here are some examples of added benefits:

  • You will learn excellent financial skills and appreciate the dollar
  • You may receive interest in addition to the amount borrowed
  • You'll understand the process of taking out larger loans when you're ready

Taking out a credit-builder loan shows your bank that you're serious about improving your financial health.

Be sure to educate yourself on the disadvantages of using these specific loans. Here are a couple of disadvantages:

  • Like a regular loan, if you miss payments then your credit score can be damaged further
  • The bank will make a little money off the transaction with some fees
  • The initial amount of money you can borrow will be relatively low

The benefits outweigh the disadvantages and require good discipline. Check with your local institutions to see if they have fees or other costs.

Other Ways to Improve Credit

If you can afford to do more than get a credit-builder loan, then utilize these methods to speed up the improvement process.

  • Unsecured Personal Loan - You can get these loans from lenders, but they come with extremely high interest rates
  • Co-sign - Have a family member co-sign on a loan to get the lender to agree to release funds
  • Secured Credit Card - This limits the amount you can spend with the card equal to what you deposit to the bank
  • Secured Personal Loan - This loan doesn't have as high of an interest rate, but does require collateral

Building strong credit requires dedication, and it's not easy. Using all these methods can be a great start to rebuilding your credit score.

Start Building

A healthy credit score is going to be the key to getting a loan for your first home or even a job. Credit-building loans can help restore your financial health.

If you are interested in learning more about saving and finances, check out more of our articles and resources.