If you are looking to purchase a home or vehicle, you need to ensure that you have a decent to good credit rating to get approved and get the best interest rates. If your credit could use some work, you may consider using a credit builder loan.
The average FICO score in the U.S. is 716; however, 677 is the average score for Black Americans. Millennials and Generation Z also have lower average scores of 680 and 674, respectively.
Let’s explain how using a credit builder loan could help to increase your credit score.
What is a Credit Builder Loan?
A credit building service is a loan that allows you to boost your credit score by making on-time payments to demonstrate to other potential lenders that you have ample creditworthiness. Some top credit building services include Self, Credit Strong, & Extra.
How Does a Credit Builder Loan Work?
With a credit builder loan, you will borrow a small amount from $500 to $2,000 and pay back the loan in 12 to 24 months. The credit builder will report on time and late payments to all three credit bureaus throughout your loan repayment term. Payment history makes up 35% of your credit score, and the only way to improve your payment history is to have more on-time payments.
Once you have paid back the loan, you will have access to the funds. The credit builder will then report your successful loan repayment to the three credit reporting agencies.
Pros of Credit Builders
There are many reasons you may want to consider using a credit building service. Here’s a look at the pros of credit building services:
You can qualify without a credit check.
You can get a credit builder loan even if you don’t have excellent credit. The chances are that you will qualify for a small loan, which can help you get started building your credit by making on-time payments.
It acts as a sort of savings account.
The money you borrow is locked in a CD until you pay it back. In a sense, this is like crediting a savings account. When you finish your last payment, you can access the funds.
The Bottomline of Credit Builders
A credit building loan is a great way to build up your credit score quickly. Before applying, you should fully understand the terms, fees, and interest rates. This could be the first step in getting the credit score you desire.