Improving your credit is always a balancing act, but it can be hard if your credit score is low. Few lenders will approve you for a new loan or credit account if you have bad credit.
Yet the best way to rebuild credit is to responsibly manage and repay debt, which you can do only if you can borrow in the first place.
If you’re facing this dilemma, the solution could be right in your savings account. Here’s how your savings can help you get a savings-secured loan you can use to improve your credit.
How a savings-secured loan can help you rebuild credit
With a savings-secured loan, your savings account, money market account, or certificate of deposit (CD) acts as collateral. In return, you get the credit you need. Here’s how a savings-secured loan works:
- You pledge part of your savings. The lender then places a hold on those funds for the life of the loan. Your savings remain in your account and continue to earn interest, but the lender can seize the money if you don’t repay the loan.
- After you receive the loan, you typically repay the debt with fixed monthly payments and a set repayment period.
- Once your loan is paid off, the hold on your savings is removed and you’ll have full access to your account.
Savings-secured loans can be effective tools to improve your credit. Here are four benefits that make them a smart option to repair your credit.
1. Bad credit won’t block your application
Lenders typically approve unsecured personal loans for applicants with good or excellent credit. This way, lenders limit their risk and avoid losing money.
But savings-secured loans are a more accessible option, even for borrowers with bad credit. The lender faces little risk of losing money by extending you a savings-secured loan.
If you fail to repay the debt, the lender can keep your savings to recoup its losses.
2. You’ll rebuild credit while paying lower interest rates
When calculating interest rate offers on traditional personal loans, most lenders base the rate on your credit score. If you have bad credit, you’ll likely face higher interest rates than someone with better credit.
Not only are savings-secured loans easier to get, but their low risk offers another benefit in low personal loan rates. You’ll usually pay less interest on a savings-secured loan than you would on an unsecured personal loan.
3. Paying on time could build a positive payment history
You’ll build a strong credit payment history if your lender reports monthly savings-secured loan payments to the credit bureaus.
If you make every loan payment on time each month, you hopefully can boost your credit score. But the opposite is also true: If you make a late payment or miss a payment, your credit could be hurt.
Make sure to check with your lender to see if your monthly payments are reported to the credit bureaus.
If you’re not great at remembering your debt’s due dates, set up systems that can act as fail-safes:
- Enroll in automatic payments through your lender. Your lender will withdraw payments from your connected bank account, so you’ll never miss a due date.
- Set up bill alerts from your lender or bank to notify you when the payment due date is near.
4. A savings-secured loan can improve your credit mix
Lastly, consider your credit mix — that is, the kinds of loans and accounts listed on your credit report. Owning different types of credit accounts will give you a better credit mix, which could boost your credit score.
In the FICO scoring model, for example, your credit mix accounts for 10% of your score, according to myFICO.
If you don’t already have installment loans, a savings-secured loan could diversify your credit mix. This, in turn, could boost your credit score and make you a more attractive credit applicant in the future.
Where to get a savings-secured loan
If you’re interested in using a savings-secured loan to build credit, you’ll need to find the right lender. There are two types of lenders that most commonly offer savings-secured loans:
- Credit unions: Savings-secured loans are a popular product for credit unions to offer. Consider joining a credit union to get access to savings-secured loans. If you’re already a member of a credit union, see if it offers savings-secured loans.
- Major banks: A few major national and regional banks also offer savings-secured loans. Wells Fargo offers both secured personal loans and lines of credit, and SunTrust offers loans secured by CDs.
Most lenders will require you to have an open savings account with them before they approve you for a savings-secured loan. Because of this, it’s often simplest to start your search with your current bank.
Once you find a lender you like, you can apply for a savings-secured loan. If possible, limit yourself to a small loan secured by savings. You’ll have lower monthly payments, tie up less cash to get your loan, and hopefully be able to repay the debt quickly to free up your savings.
Want to see your credit score rise even faster? Find other strategies and tools you can use alongside a savings-secured loan to rebuild credit. As you’re working to rebuild credit, check your scores and reports often to ensure your loan details are correctly recorded.
Do this and you’ll soon build a credit score of which you’ll be proud — one savings-secured loan at a time.
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 6.95% to 35.89%*. The origination fee ranges from 1% to 6% of the original principal balance and is deducted from your loan proceeds. 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 the time of application. The average origination fee is 5.49% as of Q1 2017. In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,025 if your APR is greater than 12%. 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. Borrower must be a U.S. citizen, permanent resident or be in the United States on a valid long term visa and at least 18 years old. Valid bank account and Social Security number are required. Equal Housing Lender. All loans are subject to credit approval. LendingClub’s physical address is: LendingClub, 71 Stevenson Street, Suite 1000, San Francisco, CA 94105.
†Per reviews collected and authenticated by Bazaarvoice in compliance with the Bazaarvoice Authentication Requirements, supported by anti-fraud technology and human analysis. All reviews can be reviewed at reviews.lendingclub.com
**Based on approximately 60% of borrowers who received offers through LendingClub’s marketing partners between January 1, 2018 to July 20,2018. The time it will take to fund your loan may vary.
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|
|6.26% – 14.87%1||$5,000 - $100,000|
|6.99% – 35.97%*||$1,000 - $50,000|
|5.99% – 24.99%2||$5,000 - $35,000|
|4.99% – 29.99%3||$10,000 - $35,000|
|5.99% – 18.99%4||$5,000 - $50,000|
|15.49% – 34.49%5||$2,000 - $25,000|
|6.95% – 35.89%6||$1,000 - $40,000|
|6.99% – 18.24%7||$5,000 - $75,000|
|9.95% – 35.99%8||$2,000 - $35,000|