How to get a credit building loan

Obtaining a credit-building loan is similar to obtaining any other type of loan. You must prove that you earn enough income to make the payments, verify your bank account and address, and provide government-issued ID. However, unlike a regular loan, you will only receive money in your pocket once you have made all agreed payments.

A credit-building loan can be a great tool to improve your credit score after a difficult financial period, or to build one if you have no score. You can choose the loan amount and length of the repayment term, and lenders report your monthly payments to the credit bureaus – just like a traditional loan. If this is the right choice for your finances, you can follow a few simple steps to get one.

How to get a credit-building loan in 6 steps

Obtaining a credit-building loan is relatively simple: there are usually no credit checks involved and you can have your account set up the same day you apply. That said, there are still a few steps you need to follow to get the most out of your loan.

1. Check your monthly budget

Do not make a new monthly payment unless you have reviewed your monthly expenses. Please note that with a credit-building loan you do not receive any money upfront. Start with a small loan amount so that you can afford the payment and avoid a situation where you cannot repay the balance.

2. Check your credit history

Although the criteria for credit-building loans isn’t as focused on your credit scores, it’s a good idea to check your credit history for any issues that could affect your approval. You can obtain a free copy of your credit report from Experian, TransUnion, and Equifax by visiting AnnualCreditReport.com. Disputes can take up to 30 days to be resolved, so make sure you allow enough time between reviewing your report and submitting your application.

If you would like to check your current credit score, contact your bank, credit union or credit card company; they usually offer free credit monitoring to their customers.

3. Compare your options

It’s always best to shop around before choosing a credit building loan. You may get a better rate, more flexible repayment terms, or lower fees if you contact multiple lenders. Please note the following when comparing lenders offering credit-building loans:

• Loan amounts. Although amounts may vary from lender to lender, most credit-building loans are between $300 and $3,000. The more you borrow, the higher your payment will be, so starting with a smaller loan is best.
• Refund Terms. With a loan, the term is the time it takes to repay the loan. The terms of credit-building loans are generally shorter, from 12 months to 36 months. The shorter your term, the higher your monthly payment, but the lower the interest you pay overall. Some lenders offer terms of up to 48 months.
• Flexibility. Generally, you cannot access credit funds until you have made all payments. However, some lenders allow you to receive a portion of the balance after you make a certain number of payments. Others can deposit money into your account after each monthly payment.
• APRs and Fees. Your monthly payment may not cover interest and fees. In such cases, these fees are deducted after you have made all your scheduled payments, which can take up a large portion of the money you receive.

4. Gather all necessary information

Lenders typically require the same documents required for a personal loan. Requirements may vary by lender, but usually include:

• A photo ID, such as a driver’s license or passport.
• Your citizen service number and date of birth.
• Your telephone numbers, address and email address.
• Copies of pay stubs, W-2s, or tax returns to prove your income.
• Employer contact details.
• Your bank account number and routing number.
• Proof of your monthly rent or mortgage payment.

5. Apply

Once you have chosen the lender you want to do business with and have your documents ready, complete the lender’s complete application. The process is usually all done online and you can upload your financial paperwork through a portal on the lender’s website.

At this point the lender will run a hard credit check and make a decision – and you may receive an answer within seconds. If you are approved, review the terms carefully and ask questions if you don’t understand how much you pay each month, what the fees are and when you will access the loan fund.

6. Make payments and track your progress

Once you sign your final documents, begin making your monthly payments. Most lenders set up automatic payments through your bank so you don’t miss a payment. If the lender offers a mobile app or online tracking option, use that to stay informed about your payment progress.

After you’ve made payments for a few months, you can track your credit score progress. Ask your lender if they offer a free credit monitoring service and sign up for one so you can keep an eye on the movement in your scores.

What a credit-building loan is

A credit-building loan is a special type designed to give individuals with no credit history or a poor credit score the opportunity to prove they are creditworthy before receiving a loan. To receive the loan money, you must first make all scheduled payments. The lender holds the total loan amount in a secured account until the loan is paid off.

Every payment you make on a credit-building loan is reported to credit bureaus, and over time the payments can help you raise a bad score or help you build a credit score if you don’t have one. Once you have made all payments, you will have established a satisfactory history with the lender and will have access to the full loan amount.

How credit-building loans work

Credit-building loans work in reverse to traditional loans. You make payments before you receive your money, rather than receiving money and making payments as you would with other types of loans.

The lender places the amount you are approved for in a secured savings account, and you pay this amount monthly. Depending on the lender, the interest rate and the way your money is paid out vary.

• You pay interest for each monthly installment and the amount minus the interest ends up in your personal savings account.
• Once you have repaid the loan in full, the money will be released in full minus any interest and fees.

Every payment you make is reported to at least one of the three major credit bureaus, which can increase your current score or provide you with credit history to generate a score if you don’t already have one.

Who is a credit-building loan intended for?

People who are new to credit, such as recent high school or college graduates, can benefit from a credit-building loan to help develop a credit score. Borrowers who have not leveraged debt may also see an increase in their scores after paying off credit-building loans.

A 2020 Consumer Financial Protection Bureau (CFPB). study found that people without debt received the greatest credit score benefit from a credit-building loan. Study participants saw a 60-point improvement in their scores compared to borrowers who had existing debt.

Nearly one in four consumers in the survey who did not have a score increased their chances of getting one by taking advantage of a credit-building loan. However, this type of loan can hurt borrowers with current debts; the study showed that the score among these participants decreased.

Once you have a credit score, you can apply for other credit products to help you on your financial journey, whether it’s a credit card, personal loan or even a mortgage. But a credit score is important for more than just financing purchases; You may need to have a good credit score to secure an apartment, get a good insurance rate, and in some cases it may make it easier to get a utility bill.

When should you avoid a credit-building loan?

If you are in crisis and need emergency financing, a credit-building loan will not help. Since the money is paid out slowly and is only the amount you deposit into it, they cannot help you in an emergency.

Instead, you should explore emergency loan options and alternatives. While an emergency loan can be an easy solution if you qualify, it can also be expensive. Nonprofits and negotiations can save you some money and get you through it.

The bottom line

A credit-building loan can be a useful tool to build or improve your credit score. However, since you won’t receive all the money until you’ve made all the payments, it’s important to choose an amount that won’t put a strain on your budget. A credit-building loan can be a stepping stone to a stronger financial future if used responsibly.