Taking out loans to build your credit might seem contradictory at first, but if you do it right, borrowing small amounts of money can improve your credit score.
Your credit score indicates how good you are at managing your finances and paying back debt. By using credit-building loans to establish a positive repayment history, you can boost your credit and prove you’re trustworthy with money.
Credit reaches deep into your life
Your credit history impacts many significant areas of adult life. Want to rent an apartment? You often need credit for that. Need to finance a new car? Your credit will be checked again.
And that’s not all, according to Ash Exantus, the director of financial education at BankMobile. “[People] may not realize, but a lot of the car insurance places are looking at your credit to determine your monthly premium,” he said.
Your credit score also might impact your ability to get a job, Exantus said. Having poor credit might be a red flag to some employers, especially when they’re hiring for a job where the employee will have easy access to cash.
How to improve your credit with credit-building loans
When you’re trying to build credit, loans can help you establish a positive payment history and add to your credit mix. You have a few options from which to choose when considering credit-building loans.
A few banks, credit unions, and private companies, such as Self Lender, offer credit-builder loans designed to boost your credit. When you borrow money, it isn’t disbursed directly to you. Instead, it’s held in a certificate of deposit (CD). You make regular monthly payments on the loan, and once it’s fully repaid, you get access to the CD and any earned interest.
Alternatively, a regular personal loan might be a useful option. Online lender SoFi, for example, offers $5,000 to $100,000 in personal loans, with interest rates of 6.99% to 14.87% APR. The money from personal loans is deposited directly into your account, but you require a good credit score and healthy income to qualify for the best interest rates.
No matter the type of loan you choose, Exantus recommends following these three steps if you’re trying to build your credit using a loan.
1. Confirm the lender’s reporting policy
Your credit is affected only if the lender reports your activity to the three main credit bureaus — Equifax, Experian, and TransUnion. To build credit more efficiently, ask your lender about its credit-reporting policy.
“Make sure that this credit-builder loan reports to all three credit bureaus,” said Exantus. Some lenders report only to one, which wouldn’t help you build your credit score with all three.
2. Borrow only the amount you can afford
“What you don’t want to do is take out a loan for the sake of building credit, and it backfires and you can’t afford it,” Exantus said. “If you’re paying it late, it becomes a blemish on your report.” That could lower your credit score even more.
Exantus recommends budgeting your finances before you take out the loan to make sure you can pay it back. An easy way to get started is by using our online personal loan calculator, which can help you estimate your monthly payments, depending on the interest rate and the term length.
3. Be proactive if you get into trouble
On-time payments are important on credit-building loans. Despite your best intentions, however, mistakes can happen. You might lose your job, get injured, or have a major unexpected expense. If you’re struggling to afford your payments, address the issue immediately.
“A lot of times people get into hardships and think, ‘I don’t know what to do. I’m not going to do anything,'” Exantus said. “They allow the payments to be late. It defeats the purpose of why you got the loan.”
The first thing you should do is contact the lender, he said. It might be willing to temporarily lower or pause payments until you get back on your feet.
“You won’t know until you ask,” said Exantus. “The first step is to reach out.”
How soon will you see results?
There’s no definite answer on how quickly your credit can improve with credit-building loans because everyone’s situation is unique. Self Lender says its customers who made regular payments on a $1,100 credit-building loan saw a credit score increase of about 45 points within six months.
The Credit Builders Alliance, a nonprofit that focuses on helping Americans build credit, says six to 12 months of on-time payments can move your credit score from nonexistent to prime.
Using loans to build credit
Remember that when it comes to building credit with a loan, you’re not borrowing the money to spend it. It’s simply a tool to help you establish your creditworthiness. If you view credit-building loans as a way to help you move toward financial stability, you can begin to put them to work for you.
It takes time to build credit, but it’s possible with patience and the right resources.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|6.26% – 14.87%1||$5,000 - $100,000||Visit SoFi|
|6.99% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|6.99% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|