Credit is an inseparable aspect of living in the modern world. It is a part of your financial health and allows you to buy now with a promise to pay later. Homes, cars, higher education, goods, and services- you can buy almost anything on credit. While many people try to lead credit-free lives, a requirement for credit may arise at any time, especially when you think about making huge expenses like buying a car or a house. When you apply for loans in such cases, the approval of your request and the rate of interest on the loan will depend on your credit history.
If you have defaulted on loan instalments in the past or do not have a credit history, financial institutions will be reluctant to offer you loans. This is because, in the absence of credit history, banks will not have a way to ascertain whether you have the capacity to repay the amount you borrow.
Additionally, any defaults with previous loans may act as red flags, denting your credit score. Lenders use your 3-digit credit score to assess whether it is safe to offer you a loan.
If you are amidst a financial emergency or require a loan for a large purchase, a poor credit score can be a deal-breaker. The positive bit, however, is that you can improve your score. All you need to do is create a record of regular payments and build a healthy credit history.
But there is a catch. If you have had a poor credit history in the past, and lenders are reluctant to offer you a loan due for the same reason, how will you repay it on time? You thus get into a loop where your low credit score doesn’t allow you to secure a loan and the inability to secure a loan comes in the way of improving your credit score.
But here is where a credit builder programme can come to your rescue!
Banks and financial institutions offer credit builder programs to bail you out of such situations. They work closely with you and, based on your financial health, employment status, bank statements, monthly income, and other aspects, come up with a plan that can help to improve your credit score. Financial institutions can help you with the best credit builder plans that can help you save money in the long run.
Why are credit builder programmes important?
Here is a quick overview of why a credit builder programme is important when it comes to building a credit history:
Tailored specifically to help you improve your credit scores: There are multiple ways to build credit. However, each circumstance demands different ways of building credit. Years of experience help banks and companies assess your profile and design a credit builder program that works best for you. They also remove ambiguity from the equation and help you with the right information and steps to improve your credit score.
Helps you become creditworthy: The primary reason for opting for a credit builder programme is to break the cycle of poor credit and become creditworthy again. A well-designed programme will help to achieve this and help you inculcate the right financial habits. You will get comprehensive advice on managing your money and loans better.
Get access to loans at lower interest rates: One adverse impact of a poor credit score is that lenders will offer loans at significantly high rates of interest. This way you will spend more and find it increasingly difficult to bring your financial issues to an end. A credit builder programme will help to improve your credit score. This will help you access loans at a lower rate of interest because the banks will now bear a lower risk when they lend money to you.
Access a wide range of loan products to fulfil your dreams: As your credit score improves, you will be eligible for more lines of credit. Sometimes, banks and financial institutions will reach out to you to offer loans at affordable rates of interest. This way you can fulfil your life goals like buying a house or your dream car.
Gives you access to the easiest way of improving your financial condition: Imagine being amidst a financial crisis without enough credit score to get a loan. Most people in such a situation reach out to friends and family or private lenders for help. This often ends up in strained relationships or a vicious inescapable debt cycle. The best credit builder programmes are designed based on your current financial condition and help to improve them without putting you under further stress. They are hassle-free and you can access them from the comfort of your home. You can submit the documents online and set automatic debits from your account.
Types of credit builder programmes
A credit builder program helps to establish your creditworthiness. Depending on the reason for your credit and your current dues, the relationship manager from the financial institution will customize a credit builder programme for you. Based on your situation, your credit builder programme may adopt one or more of the following approaches to improve your credit score:
● Review your credit report and find out what you may be doing wrong
● Come up with a plan to consolidate all your dues and pay them off using a loan that you can afford
● Reduce your credit utilization ratio
● Advise you on reducing your credit-to-income ratio
● Maintain a mix of secured and unsecured loans in your portfolio
● Help you access at least one credit product to build a repayment history
Here are some types of situations that will need different credit builder programmes:
● You have maximized your credit card limit and are unable to clear the dues: Apart from non-repayment of dues, your credit utilization ratio also impacts your credit score. To maintain a high credit score, you must limit your credit utilization ratio to 30%. If you have exhausted your credit card limit, it will mean that you have crossed the 30% mark. As a part of your credit builder programme, the lender may offer a personal loan to close the credit card debt. This will help convert your outstanding dues into EMIs. It will also reduce your credit utilization ratio because personal loans are not included in credit utilization ratio calculations.
● You have never used a credit product or defaulted payments on your previous loans: If you are a fresh graduate or have just started working, you may not have any credit history to show your repayment behaviour. This can hamper your quest to access a credit product at affordable costs. A credit builder program in such a situation will include one of the following options:
1. Secured credit card
A lender can offer you a secured credit card against a cash deposit or a fixed deposit (FD). This will act as collateral for the lender and the credit limit on this card will be equivalent to the value of the deposit. When you use this card regularly and pay the dues in time, your credit score will improve. When the credit score is higher, you can upgrade to an unsecured card and get your deposit back
2. Secured loan
When you submit an asset as collateral to the card-issuing company, the bank incurs a lower risk while lending to you. These are called secured loans. Regular repayment of EMIs on your secured loan will help you to build a credit history and get easier access to unsecured credit products.
3. Credit builder loan
A common question asked by borrowers is, ‘when all types of loans help to improve credit score, what is a credit builder loan?’ A credit builder loan is a specialized loan that financial institutions offer to build or rebuild your credit. These loans offer a small amount for a short duration but this amount is locked in your savings bank account or certificate deposit. The amount is made available to you only after you repay all the instalments along with interest. All repayments are reported to credit bureaus and your credit score slowly improves. At the end of the tenure, you get a good credit score along with a sizable amount.
The bottom line
All these steps and options to build or rebuild your credit score may seem overwhelming. However, a poor credit score can pose several problems in the long run. Working with a professional and coming up with a systematic credit builder plan can work wonders for your financial security.