Credit Builder Loans: How to Build Your Credit Rating?

Having credit is an important aspect of living in today's society. Not that many people want to be apartment dwellers for their entire lives. If you want to buy your own home you will need credit. The better the credit you have, the lower your interest rate on that home loan is and the more home you can afford.

Many people buy vehicles on credit these days. In some parts of the US, having a car is a necessity. If you have credit and a decent credit rating you can usually buy that car for affordable payments. Finally, there are always emergencies to consider. What if you have an emergency and no credit to tide you over? For these reasons and more it is important to build good credit.

There are those today who have no credit because they are just getting started in life and those who have terrible credit either through financial mismanagement or due to circumstances beyond their control. What are these folks to do to build that good credit that is so useful in navigating life's ups and downs? Fortunately, there is an answer out there called credit builder loans.

What Are Credit Builder Loans?

The concept of credit builder loans is pretty simple. If you have no credit or poor credit you may go to usually a small commercial bank or a credit union and ask if they offer such a loan. These loans can also be obtained through the Internet or through CDFIs (Community Development Financial Institutions).

CDFIs were created to help lenders in poorer communities who have trouble getting loans from traditional banks. However, you choose to do this, once you find a lender willing to advance you such a loan you will need to formally apply for that loan. Your application will most likely need to contain the following information:

  1. List all employers
  2. Give a summation of all pre-tax income from whatever source
  3. Present paystubs as proof of employment income
  4. Include at, least your, last year's tax return if you are self-employed or partially self-employed
  5. Show proof of your monthly rent payment or mortgage payment
  6. Disclose all debts or loans you are subject to paying
  7. Disclose current checking or savings balances
  8. Finally, provide some credit references

After most or all of this information is provided you should get your loan. Unfortunately, this is not a loan that you can simply put in your pocket and make off with. With the lending institution, you will need to open a savings account. This account may or may not have some level of accumulating interest.

There will certainly be interest on the loan you are granted, but usually nothing exorbitant. The reason a lot of interest need not be changed is that the risk to the institution is mitigated. Your loan amount will be deposited in the savings account that you opened and that is available to the institution to claim if you do not repay your loan.

There are two basic reasons to go for this type of loan and neither involves an immediate spending spree. Your loan payments will be reported to the three major credit rating agencies. This gives you credit if you have none and improves your credit if it is poor.

The next reason is that after the loan is fully paid you will have a pool of money that you can call savings, usually with interest attached. This hopefully might spur you to better money management and to add to that savings so you can do a down payment on your own home or even a car.

What Do Credit Builder Loans Usually Look Like?

Credit Builder Loans can be called different things depending on the lending institution. They are often known as "Fresh Start Loans." Another popular designation is "Starting Over Loans." Just put one of the above phrases in your browser and see what comes up. When it comes to getting an actual loan you probably cannot borrow less than $300 or more than $2,000.

The loan term can go from just six months to two years in most cases. If your goal is to build credit and establish savings, be sure not to bite off more than you can chew. Be absolutely sure that your repayment commitment is affordable; otherwise, what is the point.

The Main Alternative to Credit Builder Loans

One main alternative to a credit builder loans is much like a credit builder loan. There are credit cards available that will extend a credit limit to you based on the amount you have on deposit with that card. Say you have 500 dollars to deposit. You can make that deposit with this type of card and your credit limit will be $500.

Use your card as anyone would. Buy gas, groceries with it, whatever. Then, when your due date comes, pay off your balance or pay more than the minimum payment. After doing this long enough, your credit card may be willing to extend you credit beyond just what you have on deposit.