Have you ever availed of a loan?
If you have, you would know that among the various parameters that lenders require you to qualify on, one parameter is the credit score. A credit score is a three-digit number that depicts your creditworthiness. In simpler terms, the score shows lenders whether you would be able to repay the loan on time or not.
The credit score starts from 300 and goes up to 900. Scores of 700 and above are considered to be good credit scores and build a kind of trust in the lenders that their money may be returned on time. This enables them to offer you suitable credit/loans and you become easily eligible for them without any hassles when you have a good credit score. Other advantages of the credit builder programs include allowing you to negotiate the loan at favorable terms.
But what if your credit score is bad or if you are new to credit? Would you be able to avail of a loan?
A catch-22 situation: A credit score is essential to get a loan and getting credit is essential to building up a score.
A bad score can be repaired if you improve your repayment behavior for which, again, you need a loan. So, for people who are new to credit or those who have a bad credit score, getting a loan becomes challenging. This, in turn, hinders their ability to improve their credit scores.
This is where a credit builder program comes to your aid.
Credit builder program – the concept
Credit builder programs are programs that are designed solely for two types of individuals –
1. Those who have no credit history
2. Those who have a bad credit history that has hampered their credit scores
Under the credit builder program, financial institutions give credit to these individuals in the form of a loan or a credit card. Thereafter, as the individuals make regular repayments, they can build and improve their credit scores.
The credit builder program, thus, serves two purposes –
1. Establishing credit for those who do not have a prior credit history
2. Helping people with bad credit scores improve their scores by giving them an opportunity to exhibit better repayment behavior.
Credit builder program – the benefits
Given their nature and relevance, credit builder programs have a lot of benefits for individuals. Some of these advantages of credit builder programs are explicit while the others are not. Have a look –
● Help establish a credit history
The credit builder program is specifically helpful for individuals who don’t have a credit history. By allowing them a form of credit, the program helps them establish a credit history so that they become eligible for loans in the future if they need funds for their needs.
● Help build up a good credit score
For both - new credit users as well as individuals with a bad score - the credit builder program is helpful. As new-to-credit users get credit, they can build up a good credit score if they make the repayments on time. For users with bad credit, regular repayments on the new credit can help in improving the score, bringing it from the red level to a green one.
● Increase the creditworthiness of individuals
As the credit score builds up, the creditworthiness also increases. Future lenders can see that by using the credit builder program the users have maintained a good repayment history. This makes them look credible to lenders as it establishes that they would be diligent with the repayments of the future loans that they avail of.
● Helping individuals become eligible for loans and credit cards
As new-to-credit users establish their credit trail and people with bad credit scores improve their scores, they become eligible for loans and credit cards with special features such as higher limits or a negotiable interest. Users of credit builder programs, with enhanced credibility, can apply for loans in the future once they have reached a good score.
● Allowing individuals to get favorable credit terms
The credit builder program helps individuals establish and/or build up a good credit score. A high credit score not only allows such individuals to get a loan, but also helps them negotiate favorable credit terms. Borrowers with a good credit score can negotiate lower interest rates on their loans.
Moreover, as lenders favor borrowers with high scores, they can also negotiate the repayment terms to ensure that the loan suits their pockets.
● Increasing the penetration of credit in India
On a macroeconomic level too, credit builder programs help. By making more individuals eligible for borrowing, credit builder programs help in increasing the credit penetration in India. This not only helps give a boost to the economy but also increases household consumption and helps in improving the standard of living.
The bottom line
Credit builder programs are a relevant and beneficial way to establish a credit history and build up a credit score so that you become eligible and can avail of credit facilities when needed. So, if you are new to credit or have a bad score, unlock the advantages of credit builder programs to build your credit.