You might be aware of the fact that personal loans can only be given if the borrower’s credit history is good. This is where the importance of credit score comes into play. It’s the most essential factor in the process of getting a loan. However, if you, as a borrower, have a poor credit score or history, then you must have a harder time getting good credits.
According to the report, around 28 million Americans are credit invisible. It means that they have no credit history with a nationwide consumer reporting agency.” Do you know that there’s one surefire way to improve your credit health?
If not, then the answer is “yes”.
A personal loan can do wonders for you in difficult situations. The important thing is that one should use it responsibly since a personal loan can help you pay off debt. In addition, it can help you to establish a good payment, which could boost your credit scores. Nevertheless, sometimes, lenders do not approve personal loans with favorable terms. In this situation, you need to consider some wondrous ways to build a good credit score with a personal loan.
Let’s get started!
Here’re some methods to build your credit score with a personal loan
Sometimes, it is hard for newbies to get typical forms of credit, e.g. credit cards. Therefore, establishing credit is not always easy. A credit-builder loan is an option, which typically does not require a credit history. It is specifically designed to help you build credits while making payments towards the loan. Like other loans, credit-builder loans also come with costs. It means that the user needs to pay interest throughout the length of his/her loan. Even so, some lenders might reimburse their users for some of the costs after they repay the loan.
Where to find it?: The credit-builder loans can be found at community banks and local credit unions. Additionally, there are also some online lenders and fintech companies, which specialize in helping people in order to rebuild their credit. This kind of loan is one of the products offered by these types of lenders.
If you think you can get easy personal loans with bad credits, then you are right. You actually don’t need to get a good credit score to qualify for a credit-builder loan. This is due to the fact that they are typically designed for people who are building and rebuilding their credit above all.
Nevertheless, some credit-builder loans do not need credit checks. All you need to keep in mind is that you may need to pay a small amount of fee upfront while opening your loan account.
The credit-card builder is best-suited for those with bad credits or no credit history, and those who want to save money while building credit.
Debt Consolidation Loan
The term “debt consolidation loan” is one of the methods to refinance debts. Suppose, if you apply for a loan for some amount that you owe on your existing debts. Once it is approved, you will use the funds to pay off your debt balances. After that, you will pay down the new loan over time. Put simply, a consolidation loan can be chosen with the following features:
Loan type: One of the most common types is personal loans which are credit cards with an introductory 0% APR (Annual Percentage Rate), 401(k) loans, and home equity loans.
Loan terms: These include the amount of loan, interest rate, and length of the loan, which all depend on the type of loan the user gets and financial health.
Secured vs. Unsecured: A secured loan also means a collateral loan. For example, if you live in Texas, and a home equity loan is secured by the borrower’s home. If the borrower fails to complete the payments, the lender should take the collateral to satisfy the unpaid balance. If a borrower does not want to risk his assets, it’s advised to consider sticking to unsecured loan options, such as personal loans and 0% APR credit cards.
Who is the best one for this loan?: Debt consolidation loan is ideal for individuals who want to consolidate the balances on their high-interest credit card into a loan product with a competitive rate. All top of it, it is because of saving money and streamlining the repayment process.
Check out some risks associated with personal loans to create credit
Mostly, personal loans are useful for improving credit ratings. But, it also has some risks. Before moving ahead, think carefully through the following risks and make sure that taking out a loan is the right choice for you.
Keep in mind, that you should not take loans if the debt causes financial hardships. Even though using your personal loan to pay off debt and reduce interest rates, it is essential that you should limit your spending behavior. Since such problems can add more debt while paying off your personal loans.
Hard Enquiry On Your Credit Report
Whenever you apply for a personal loan, you will get a hard inquiry on your credit report. The credit score could drop, but the impact would not last for longer than a few months. Such things are manageable most of the time; however, it can become detrimental if you shop around for loans and end up with multiple hard inquiries on your credit report.
Other Methods to Build Credit
According to Mia Ran, CEO at Texo Finance: “If you are clear with the fact that you need to pay more on a personal loan than just the amount you borrowed interest. Fees come with every kind of loan. Make sure to go through the fine print to know what fees are associated with any loan before signing on the dotted line.”
Becoming an authorized user can help build your credit since when you co-sign, you actually share complete responsibility for the loan. If you and other account holders make monthly payments, then you can get benefits from the credit. Top of it, if the other person misses out on any payments, then it will affect your credit ratings. The main thing is that you will also be legally responsible for making up the lost payments.
Secure Credit Card
The secured credit card is a special type of credit card, which uses the money to serve as collateral against the line of credit, that you have on the secured card. The limit of credit cards is mostly based on the size of the security deposit, which you make while applying for the card. In short, making regular payments can enhance your credit score.
Reporting Alternate Payments
Some service providers are there, who may be willing to report account activity to the credit bureaus upon request. There are mainly three primary credit reporting agencies, such as TransUnion, Experian, and Equifax, and ask them if they could report payments on your behalf. Moreover, you can also ask your landlords to report rent payments.
Personal loans can only be a lifesaver if you use them to consolidate debt or maintain a payment history timely. If you pick a personal loan for building credits, bear in mind, be careful regarding the risks involved and compare different quotes from multiple lenders in order to ensure that you are getting the most affordable possible loan as per your circumstances.