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credit scorebad credit Jan 14, 2021

How to Build-Credit with a Credit Builder Loans or Secured Credit Card

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How to Build-Credit with a Credit Builder Loans or Secured Credit Card

Whether you lack credit history or have low credit score, you need to work on building your it up because one day you may need to get a loan and paying it back responsibly. Building credit however doesn't happen overnight, but it's essential for a carefree financial future, so it's worth the time and patience you need to invest.

The easiest way to boost your credit is with credit-builder loans and secured cards. These lending products are specially designed to serve this particular goal, restoring your score to a higher level. We'll take a close look at each of them, to see exactly how they work, and which of them seems to be a better option.

Credit-Builder Loans

Credit-builder loans come from certain banks and credit unions, and they are provided as a tool for boosting your financial abilities. It's a pretty safe option as far as the lender is concerned, as you will see once we explain how they work.

These type of loans is one of the few lending products that don't require a good credit score to be approved. The reason is you won't receive the money immediately. Once the contract is signed, the lender will hold on to the funds you applied for until you make all the payments. Every month you will make installments payments, just like you would with any other loan.

But you won't be able to access the funds until you make the last payment. In a way, it's like creating a savings account. The money will be safe and out of your reach for the duration of the loan.

On the bright side, when you finish all the payments, you will have a lump sum you can use in any way. At this point, it's a good idea to keep that capital as an emergency fund, considering you are already used not to be able to touch it. On top of that, once the loan is paid off successfully, your score should rise.
Every payment you made has been reported to the main credit agencies (TransUnion and Equifax), so your score is slowly improving over time. Of course, that only works in your favour if you pay on time. That's why it's essential to assess your finances realistically before taking such a loan.

There is also another aspect of these loans. It ultimately makes sense, but it's essential to consider it before applying. In the case of credit-builder loans, you will pay interest for the loan, so once you make the last payment, the amount you receive will be smaller.

Overall, these loans bring benefits to both parties involved. The lender compensates the risk of offering a loan to someone with poor credit by not releasing the funds before the installments are fully paid. On the other hand, the borrower is improving their worthiness and creating a savings account simultaneously.

So, should you take loan to help build your borrowing power? Well, there is one more advantage that we haven't mentioned yet. You can take such a loan for a low amount, people usually choosing between $300 and $1000, meaning the monthly payments won't be hard to cover, and the interest rate won't be that high. Even so, the effect on your credit history will be the same. If you don't have any other debt while paying this loan, the impact on your credit will be even more significant. So, it may be worth trying.

Secured Credit Cards

A secured credit card can be another good option when you want to start building up your financial means. It's another lending product, and, to some extent, it's similar to the loans we discussed above.

But there is also a significant difference between the two. While in the case of credit-builder loans, the lender was providing the money, with secured charge cards, you have to make a deposit right from the start.

As the name suggests, secured credit cards require collateral. Instead of using your assets as it happens with some loans, you need to make a deposit when you apply.

The limit of your bankcard will be set depending on the amount you deposit. Apart from providing the deposit upfront, you also have to pay interest on the purchase balance.

You will be opening an account and depositing a sum sufficient to cover your card limit. Indeed, in some cases, the provider may increase the limit either from the start or along the way. In any case, the deposit you make is entirely refundable.

The advantage is that the money will be available in the form of a credit limit. Depending on the finance company, you may also have the option to increase the limit by making another deposit, but that's a one-time occurrence.

Financial institutions usually report all payments to the credit bureaus. Just like it happens with credit-builder loans, that can either work in your favor or against you. If you have delays, you will be making your situation even worse. That's why you need to be extremely sure you can make the payments before you start using this bank-cards for shopping.

In some cases, you may also be offered another interesting option. After a period of correctly using the secured card and making the payments on time, your provider may give you a chance to upgrade it to unsecured debt. Some providers also offer a way to earn cashback.

Credit-Builder Loans or Secured Credit Card?, which should you choose?

You need to consider several factors before deciding, like your current financial situation, needs, and overall goals.

If all you want is to build up your credit score, a secured card can be the answer. But it would help if you had some savings that you can use as collateral. On the other hand, with a loan that helps you build up your financial resource, you don't have to make any initial payments because the lender will provide the money. As you make the payments, you will also be saving money because the funds will be entirely out of your reach until you finish paying the loan.

Whatever option you choose, it's essential to know that building your borrowing power isn't a quick process. Indeed, you will see a particular improvement even after one month. But to raise your score significantly, you need to keep showing you are creditworthy for a more extended period.

Until your credit score gets to the desired level, you can always cover financial emergencies with unsecured loans, even if you have a bad credit score.