A bad credit score is a black mark on your creditworthiness. Taking a Credit Builder Loan helps you rebuild your credit score
Say you’re taking a loan for the first time, and you’ve just taken up your first job. In such a case, you won’t have what’s called a ‘credit history.’ To build your credit score from scratch, you can avail Credit Builder loans.
Here’s another scenario: you’ve defaulted on several loan repayments. As a result, your credit score has plummeted. Credit builder loans can prove handy to rebuild your credit score here as well.
What is a Credit Builder Loan?
Credit Builder loans are those that are taken specifically with an intent to establish and improve your credit score. Unlike regular loans, where you can access the funds, credit builder loans do not give you access to money, but rather help to boost your credit score.
How Does it Work?
Generally, such loans are not for a very large sum. You apply to a bank which will credit the funds to a savings account. Once you make the regular repayments in full, you can access the money. These on-time repayments will help to improve your credit score.
Such loans are taken when you’re building your credit history or are not keen to utilize your credit cards to a large extent or you want to take a home loan ( for which you need a high credit score).
These loans also help when you’re recovering from bankruptcy.
Credit Builder Loans – No Credit Check
Every lender conducts a credit check before approving your loan. The better your credit score, higher are your chances of having an approved loan in your hand at favorable terms. But, what if your credit score is poor? Well, that is where you can avail credit builder loans. Banks offer you such loans without insisting on a credit check.
This is the biggest advantage of credit builder loans. Despite not having any credit history or you have a low credit score, you can avail this type of loan and improve your CIBIL score. Thus, credit builder loans help you to avail other types of loans easily.
Should I Get a Secured Loan to Build My Credit?
A secured loan is one that is backed by an asset or a collateral. In case of a default, the lender uses the collateral to recover the debt.
When you’re looking to build your credit, a secured loan definitely acts in your favor. The interest rate will also be lower. The locked-in fund taken as a loan will help to build your savings as well.
In addition to a secured loan, a secured credit card (charged against a deposit) also helps you to build credit.
Also Read: Few Tips to Improve Your Credit Score
A secured loan/credit card is a tool to demonstrate a responsible credit behavior. Make all payments on time which impacts your credit report positively, thus helping to improve your credit score.
Before taking a credit builder loan, quantify the interest you’ve to pay, the monthly payments, duration and the value of the collateral. Also, make sure that your credit behavior is reported by the lenders to the credit bureaus.