Make timely payments. If you repay the loan on time, you will accumulate positive information on your credit reports. A payment that is more than 30 days late, on the other hand, will appear on your reports and can drastically harm your credit score.
Keep track of your credit score. To obtain a free credit score, visit a personal finance website such as NerdWallet. NerdWallet updates your score weekly; keep an eye on the broad trend of your score, but don’t get too caught up in small swings.
Determine what you want to do with the loan money and any interest. You get the money and, most likely, an improved credit score at the end of the loan period. Use that money as an emergency reserve if at all possible. Even a few hundred dollars saved can protect you against unforeseen expenses that could otherwise lead to debt, missed payments, and credit score harm.
Where can I get a credit-builder loan?
Community banks or credit unions: Finding a credit-building loan can be difficult. Searching online for “credit builder loan” is one option. Credit-builder loans may be available from local community banks or credit unions. Credit unions generally include membership restrictions, such as living in a specific county, working for a specific company, worshiping at a specific church, or making a small charity payment. However, they may have the lowest interest rates. It pays to double-check.
CDFIs: If your credit union or community bank does not provide them, you could look into a Community Development Financial Institution. There are around 1,000 of these groups in the United States that exist to assist low-income areas.
Lenders on the internet: Credit-builder loans can be found by conducting an online search. However, not every lender is licensed in every state, so double-check. Furthermore, payments, periods, and APRs vary greatly.
Circular lending: A credit-building strategy offered through lending circles is one approach that can be implemented among family or friends. A lending circle initiative is sponsored by the non-profit Mission Asset Fund. Participants receive interest-free “social” loans, with payments disclosed to credit reporting agencies. There is a limited supply. Other businesses provide lending circles as well.
In such organizations, around ten individuals each agree to contribute a particular amount every month, and the money is distributed to one person each month in a round-robin way until everyone has received a pot of money.
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Other credit-building options
If you have money in the bank, you might be able to get an installment loan through a share- or certificate-backed loan. In that situation, the collateral is a deposit you already have with the financial institution, which is locked until the loan is repaid (or it may be incrementally thawed, as the loan is repaid). So, if you have money on deposit at a small bank or credit union, it can be worth asking whether you can borrow against it to help you rebuild your credit. Other lenders might let you borrow against the value of your vehicle.
You might also ask a friend or relative with excellent credit to add you as an authorized user on a credit card if that is an option. As an authorized user, the card’s account history will be posted to your credit report. They don’t have to give you the card, and you don’t have to use it – simply being connected with their outstanding credit profile benefits yours.
Secured credit cards are another option for building credit, but they demand an initial deposit, which normally starts at $200. You can also look at alternative credit cards that do not require a deposit.
If you are attempting to develop credit and require loan profits urgently (for debt consolidation, for example), you will most likely need to take out an unsecured personal loan. That implies the lender has no collateral to fall back on, except the strength of your credit history. If your credit is damaged or thin, you’ll pay higher interest rates, often as much as 36 percent, which is usually the upper limit with most credit-checking personal loan lenders.
Some lenders will provide you with unsecured personal loans without even verifying your credit, but those installment loans function much more like payday loans. Because lenders may not record payments to credit bureaus, they are ineffective for credit building.