If you want to build your credit score but are having trouble getting a credit card, you can always use a secured credit card to do it. But what if you don’t have the money needed to pay the deposit for the secured credit card? This is where credit-builder loans come in. They’re not as well known, but they’re a great financial tool which can help you establish or even re-establish your credit.
What credit-builder loans are and how they work
The purpose of the credit-builder loan is, as the name suggests, to help you achieve credit respectability. Generally, they’re offered by smaller financial institutions, such as credit unions or community banks.
It doesn’t matter if you have bad credit or no credit at all, you will be approved for the credit-builder loan. However, the lender still has a safety net. The money that you borrow is actually deposited in a savings account. And you can’t access it until you fully repay the loan.
If you do pay the loan as agreed, then your lender will send a good report to the credit bureaus. At the end of the term, you get both the money and a better credit score. But be sure to make all the payments on time, because your lender will also report the missed payments. This information won’t help your credit score at all! Additionally, the financial institution can also reclaim the money if you don’t hold up your end of the bargain.
Credit-builder loans are just financial tools and, just like any tool, they’re only as good as the people who use them. If you’re not responsible, if you don’t change your spending habits, then getting a credit-builder loan won’t help you build good credit. Before you apply for one, you have to fully commit to your goal. This is the only way to really build credit.