Using a Credit-Builder Loan to Rebuild Your Score
If you’re worried about bankruptcy because of what it will do to your credit score, keep in mind our attorneys have helped people get back to an A rating – even after bankruptcy – for years. Among other tools, you can rebuild your credit score after bankruptcy with a credit-builder loan.
So here’s what credit-builder loans are, how they work, and how you can use them to rebuild your credit score and regain your financial footing.
Understanding Credit-Builder Loans
A credit-builder loan is a financial product designed specifically to help individuals with less-than-stellar credit histories rebuild their credit scores.
With traditional loans, you receive the loan amount upfront. However, with a credit-builder loan, they keep the loan amount in the bank as an account for you. You make regular payments, which are reported to the credit bureaus. This gradually improves your credit history and, consequently, your credit score.
How Credit-Builder Loans Work
Loan Amount:
You typically borrow a small sum, often ranging from $300 to $1,500, although the specific amount can vary depending on the lender, your timelines, and your ability to repay.
Loan Terms:
Credit-builder loans usually have short terms, often ranging from six months to two years. During this time, you’ll make fixed monthly payments into an account, and they hold the money for you until the loan is paid off.
Payments into Savings:
Instead of receiving the loan amount upfront, your payments are held in a savings account or CD controlled by the lender. This serves as collateral for the loan. But it also becomes a savings account for you once the loan is paid off in full.
Regular Reporting:
The lender reports your monthly payments to the three major credit bureaus (Equifax, Experian, and TransUnion). This positive payment history gradually improves your credit score.
Steps to Rebuild Your Credit After Bankruptcy with a Credit-Builder Loan:
Find a Reputable Lender:
Start by researching and identifying lenders that offer credit-builder loans. Look for lenders with transparent terms, fair interest rates, and no hidden fees. Credit unions are often a great choice, with small banks a close second.
You should also make sure in advance that the lender reports your loan payments to all three credit bureaus instead of just one.
Apply for the Loan:
Once you’ve chosen a lender, apply for the credit-builder loan. Credit-builder loans are designed for people with low or little credit, so as long as the institution offers it as an account option, you will usually qualify.
The bank should tell you quickly whether or not they approve you for the card. This process is often relatively smooth, because there’s very little risk to the bank.
Make On-Time Payments:
The most critical aspect of a credit-builder loan is making consistent, on-time payments. Treat this loan as a priority in your budget to ensure you never miss a payment.
If you’re concerned about making regular payments, start with the lowest loan option possible. This will lower your payments and make it easier for you to keep up with the terms of your loan as the months go on.
Monitor Your Progress:
Regularly monitor your credit reports and credit score to track the positive impact of your credit-builder loan. You should start seeing improvements in your credit history and score over time. You can use credit-monitoring apps to help.
Gradually Build Credit:
As you successfully complete your credit-builder loan, you’ll establish a positive credit history and boost your credit score. This can open doors to better financing terms and financial opportunities down the road.
Use Other Credit-Building Tools at the Same Time:
In addition to a credit-builder loan, consider other credit-building strategies. There are a lot of other tricks to rebuilding your credit after bankruptcy, including:
- checking your credit report
- budgeting well
- becoming an authorized user
- and using a secured credit card.
Help Rebuilding Your Credit Score After Bankruptcy
Rebuilding your credit score is a gradual process that requires commitment and smart financial choices, but it’s definitely doable. A credit-builder loan can be a valuable tool in this journey, along with other ways to rebuild your credit after bankruptcy.
Our Memphis bankruptcy attorneys are committed to helping our clients recover their credit scores, even and especially after a bankruptcy. To help, we’ve even written a free report called “Life After Bankruptcy” that guides you through some of the most frequently asked questions about moving on after you get a fresh financial start.
If you have any questions or would like to get started with the bankruptcy process, contact us today at 901-327-2100 or reach us online. The conversation is free, no strings attached.