Most of us know the importance of a high credit score for securing a loan. However, it often skips our consideration and we do not make any effort to maintain it until we need credit. A loan rejection or high-interest rates are undesirable scenarios that you can avoid only by maintaining a spotless credit history. While it sounds obvious and easy to build a flawless credit record, many of us land up with low credit scores. This includes new people in the workforce, recent immigrants, or those with a history of skipped or delayed payments because of financial emergencies. Credit rebuilding programs are a solution to such situations. They help to rebuild your credit score and make you eligible for low-interest loans.
Are you wondering how to rebuild bad credit? This article will help you understand credit-builder loans and other options for building and rebuilding credit.
How to build credit quickly
‘How to rebuild my credit score?” This is a common question that people with irregular or non-existent credit history ask. If that is your question too, below are some ways to build your credit quickly:
● Pay all your loan EMIs and credit card balances in time
● Request for a higher credit limit on your credit products and limit your usage. This will help to maintain a low credit utilization ratio
● Keep an eye on your credit report to spot and report any errors or scams that may affect your credit score
While these are effective ways to build a good credit score, you can use them only if you have access to at least one line of credit. If your credit score is preventing you from getting any loans, a credit builder loan can help.
How a credit builder loan can help build credit?
Reasons behind a low credit score include missed or delayed credit payments in the past and the absence of credit history. This can only be fixed if you create a record of regular payments. However, it is difficult to secure a loan when your credit score is not healthy. This creates a loop wherein your poor score doesn’t allow you to secure credit and you have no way to create a repayment record and boost your score.
Credit Builder Loans are a practical choice in such situations because their approval is not dependent on your credit history. When you apply for these loans, the lender assesses your eligibility based on your employment status, monthly income, balance in your bank account, history of tax payments, etc.
Once your credit builder loan gets approved, the lender transfers your loan amount to your savings account but restricts access to it. This amount is divided into 6-12 installments and interest is added to it. You must pay these installments along with interest to get access to the loan amount. The lender reports these regular repayments to the credit bureaus and thus your credit score improves. This makes it easy to get new loans in the future.
Note that lenders do not offer upfront access to the loan amount. This amount serves as collateral for the lender and is released only after complete repayment. This minimizes the risk for the lender. Thus, these loans are different from other bank loans that credit the loan amount first and charge EMIs later.
Top reasons a credit builder loan is a good idea
Credit builder loans are designed to bail borrowers out of tough financial situations. Here’s how they are helpful:
● People who do not have a credit history can kick-start it using credit builder loans. This includes fresh graduates and new immigrants for whom it may be the only source of credit.
● These loans help to improve credit without propagating the debt cycle.
● They open avenues for loans with lower interest rates, and credit cards with higher limits.
● They make it possible to bounce back financially after hard life events like bankruptcy, medical emergencies, or divorce.
How to secure a credit builder loan?
There is often ambiguity regarding the steps involved in securing a credit builder loan. The steps below will make the process quicker and easier for you:
● Assess offerings from different banks and financial institutions to know about interest and charges that you need to pay over the borrowed amount. These details and repayment terms will help you identify the best credit builder loan. You can also look for credit builder loans online.
● Organize the documents based on the requirement list from the lender. This will include bank details and statements, identity proofs, income proof, and other documents.
● Opt for a loan amount that is easy for you to repay. While a credit builder loan can increase your credit score, missed payments will hurt it further.
● Apply for the loan online once all documents are in place.
● Once the lender approves the loan, they will open a savings account for you and transfer the loan amount. However, you can access the amount only after you repay it in full.
● Pay the EMIs that include a portion of the principal amount borrowed and applicable interest
● The lender will release the amount in your savings account once you have paid all the installments.
Other options available to build and rebuild credit
Credit builder loans aren’t the only ways to build and rebuild your credit score. Your credit rebuilding programs may also include any of the following options:
Secured credit card: Using a credit card and making timely payments on it is a great way to rebuild your credit score. However, not all credit cards are available to people with poor credit scores. A secured credit card is a viable option in such cases. These cards require you to pay a cash deposit to the bank. The bank uses this deposit as collateral against the card. The credit limit for this card is equivalent to the deposit amount and in case of non-payment of credit card dues, the bank can withdraw money from the deposit. Using a secured credit card responsibly can help you improve your credit score. Once your credit score is better, you can either upgrade this card to an unsecured one or close this card and opt for an unsecured credit card.
Secured loan: Secured loans need you to offer an asset as collateral to the bank. This way the bank ensures that their money is safe. However, these loans are available only to users with a certain credit score. A credit score below that will not get approval for a secured loan.
Unsecured loans: These loans do not require you to submit an asset as collateral. The interest rate of this type of loan is higher owing to the risk that the lender bears. If your credit score is enough to get a personal loan, it can boost your score. A personal loan makes for a better credit mix and regular repayments will improve credit score. The credit utilization ratio calculation doesn’t account for personal loans. If your credit card dues are exceeding the ideal credit utilization ratio of 30%, you can use a personal loan to clear them and save your score.
Become an authorized user on a credit card: Request a friend or family member with good credit habits to add you as an authorized user on their credit card. This way their regular repayments will improve your credit score. You do not have to access the account or use the card, just being authorized will reflect in your score. The cardholder can set limits for the authorized user or not share card details at all. This will make them more comfortable about adding you. Be careful about whose card you are getting added to, as their missed payments will hurt your score.
Get a co-signer for the loan you are applying for: If someone with a decent credit score co-signs the loan, they tell the bank that they share the responsibility of repayment. This makes it easier for ones with low credit scores to get credit and build a good credit score.
The bottom line
With a proper credit-building program and adequate financial discipline, you can easily rebuild your credit score within 6 months. If you use secured or unsecured loans to build your credit, you could fall into a debt cycle. This will also result in hard inquiries on your credit report. Do not apply for multiple loans at a time. Exercise caution and apply for credit only when you need it. Once your credit score improves, be regular with your payments, and maintain a credit utilization ratio below 30% to maintain a high credit score.