There are things you can do to rebuild your credit history.
Credit builder loans are a great way to rebuild your payment history and improve your credit score.
This article looks at how credit builder loans work and how they can help your credit score.
Get Pre-Approved for a Mortgage with a 580 Credit Score
How Does a Credit Builder Loan Work?
A credit builder loan is a loan you would get from your local bank. You will be required to deposit the loan amount of the loan to the bank to receive a personal loan for the same amount.
For example, if you want to get a credit builder loan for $1,000, you would be required to deposit $1,000 into a savings account that you cannot touch until the $1,000 loan is repaid. You will have a set repayment play with set monthly payments. After you make your last payment, the funds you deposited will be free for you to withdraw.
Credit builder loans are given to borrowers who have had credit issues and are looking to improve their credit score. As long as you make your monthly payments on time, the bank or credit union will report the timely payments to the credit bureaus.
Where to Get a Credit Builder Loan
Local Credit Union or Bank – The best place to start looking for a credit builder loan is your local bank or credit union. You have an established relationship with them, so they are more likely to offer you a loan with good loan terms than a financial institution that has no relationship with you.
Online Lenders – Lenders you find online offer various loan options and have the flexibility to offer competitive loan terms to compete with other lenders. Most credit builder loans are unsecured, but if you have collateral such as home equity or a vehicle you own now outright, you may be able to get a loan with better terms if you have some collateral.
Online Crowd Funding Sites – As a last resort, you could ask people close to you for money to fund your plan. Whether it be close relatives, friends, and other family members, you can set up an account with a crowdfunding site. People you know can contribute to your cause by donating money to your account.
Alternatives to Credit Builder Loans
Get a secured credit card – A secured credit card works similarly to a credit builder loan. You will be required to give a deposit equal to the credit limit to the creditor that will be held in an escrow account until you either close the account, or it is converted to an unsecured account. Secured credit cards work just like a regular unsecured credit card; your monthly payments will be reported to the credit bureaus. Some creditors will convert your secured credit account to an unsecured credit account after 6-12 months of timely payments.
Get a Personal Loan – There are personal loans you can get with less than perfect credit. Some personal loan lenders only require a 580 credit score. Interest rates will be higher on these loans, but each payment is reported to all three credit bureaus and will help you build positive payment history.
Have someone add you as an authorized user – An authorized user is a second account holder on a credit card account with access and can use the account. Authorized users have their own card, and the entire account history since the beginning will be reported to their credit report. If you do have someone add you as an authorized user, make sure their account is in good standing with no late payments and a low balance.
How Your Credit Score is Calculated
Payment History (35%) – Your payment history is the biggest factor in determining your fico score, making up 35% of your overall credit rating.
Credit utilization (30%) – Credit utilization is the amount of available credit you are currently using. The higher your credit card balances, the lower your credit scores will be, and vice versa. Try to pay down your card balances to less than 30% of your credit card limits.
Length of Credit (15%) – The length of time you have your accounts open accounts for 15% of your score.
New Credit (10%) – New credit accounts and hard credit inquiries make up 10% of your overall score. Each time a lender pulls your credit counts as a single hard inquiry. Having too many credit inquiries can negatively affect your score.
Mix of Credit Accounts (10%) – Having different types of credit accounts on your report makes up 10% of your score. You should have a good mix of installment loans, such as an auto loan, mortgage, or personal loan. As well as revolving accounts such as credit cards to maximize your FICO score.
A credit builder loan will help you establish credit and rebuild your bad credit. If you have poor credit, you need to build credit to improve your credit score. A credit builder loan secured credit cards, and being added as an authorized user can help you build credit.
You should check with your local bank or credit union to see if they offer credit builder loans with competitive interest rates.
Read our article on how to improve your credit asap.