What is a Credit Builder Loan?
You probably already know that poor financial decisions can negatively impact your credit score and follow you around for years. On the other hand, having no credit history can also hold you back from purchasing your first home or vehicle. Trying to get your finances sorted can be all consuming and stressful, but there is a way out of these two scenarios. Credit builder loans can prove financial trustworthiness without the use of a credit card and have you well on your way to an ideal credit score.
Having a good credit history can help you gain access to more financial resources in the U.K; however, it’s important to note that building a strong credit history takes time and commitment to being fiscally responsible. Below we answer the most common questions on credit builder loans and offer additional tips to get you started on your credit building journey.
What is a Credit Builder Loan?
Credit builder loans are sometimes called “fresh start loans” or “starting over loans.” This type of loan is designed for people who are looking to develop a good credit profile or want to repair their credit profile.
If you’re approved for a credit builder loan, the lender puts the money you agreed to borrow into a lender held bank account. This is an account you cannot access until you have repaid the loan and any interest charged. This account is for the sole purpose of building credit. You then make regularly scheduled payments at a fixed amount over a certain period of time, usually six to 24 months, to pay back the loan and interest. The amount you’ll need to pay back depends on the size of the loan and the interest rate. The best part about a credit builder loan is that the lender will return the total balance (sometimes including the interest paid) at the end of the term.
Where do I Apply for a Credit Builder Loan?
In order to secure a credit builder loan, you will need to seek out smaller financial institutions like credit unions, community banks or online lenders. Credit unions have a reputation of helping members save regularly and borrow responsibly.
When you meet with the financial institution of your choosing, make sure to ask about interest rates, fees associated with the loan and repayment terms. It’s important to also ask the lender if they return a portion of the interest paid as “dividends” at the end.
How Does a Credit Builder Loan Improve My Credit Score?
The most important factor to building credit is making payments on time. A credit builder loan is designed to help you establish a documented history of fiscal responsibility in the form of on time payments.
If you’re on a tight budget, make sure that you can pay on time, every time. The size of the loan does not matter—paying on time does. The lender will then report the payments to the three main credit bureaus: Experian, TransUnion and Equifax.
Credit builder loans are designed to help you but if you miss payments, much like any other loan, they can bring further harm to your credit score.
What is the Process for Getting a Credit Builder Loan?
Gaining approval for a credit builder loan can look a bit different than traditional approval processes. Instead of looking at your credit history for approval, some lenders will look at banking history. This is because they know you are taking steps to improve your credit and want to provide you access to financial products. However, bounced checks or other marks on your banking history can threaten approval.
Most lenders will look at the following criteria:
- Employment verification (monthly income, paychecks, etc.)
- Tax information
- Housing payments (mortgage or rent)
- Other loan balances
- Bank account balances (checking and savings)
Other Alternatives for Building or Repairing Your Credit
The Pave app credit builder actively works with you to help you build your credit score. We offer credit building insights that are targeted, actionable and unique to you, and report your good behaviour to help build your credit health. We partner with Experian, Equifax and TransUnion to improve your credit history through your monthly membership fee of £9/month. There's no magic bullet to improve your credit score overnight but Pave credit builder builds credit the proper way.
Pave has been voted the Best Credit Building Product in 2021 by customers in the Consumer Credit Awards and was voted the Best New Personal Finance App 2021 by Moneynet.