How to Use a Personal Loan to Build Credit?
6 Min Read
Reviewed by Latoria Williams If you’re trying to build your credit, the best solution is to borrow a personal loan. It is also called a credit builder loan, but you should think twice before getting it. While many lenders may be ready to deal with your credit report, getting good terms may be difficult. And if you’re not diligent, you can discover that the lender isn’t assisting you in building credit at all.
1F Cash Advance team decided to provide you with everything you need to know about receiving a personal loan to build credit and suggestions for alternative methods to improve your credit score. Check our tips and tricks and decide what way will work for you.
Does Getting a Loan Build Credit?
Yes, it will build your credit only if the lender will report your on-time payments to the major credit bureaus. So, you must ensure you can cover the personal loan on every month’s due date because your missed payment could affect your credit score in the long term.
How Do Personal Loans Build Credit?
Usually, personal loans that help you build your credit history are often provided by smaller financial organizations such as credit unions and community banks. However, sometimes you can also get them from direct lenders that report your monthly payments to major credit bureaus.
If your loan request is approved, the funds will be deposited in a bank account, and you’ll make monthly payments. Further, these loan payments are reported to at least one major credit company. Our financial experts suggest searching for loans that report to all three.
How Is Your Credit Score Calculated?
Your credit score is calculated using information from your credit reports, compiled by the three leading credit agencies. As long as you pay on time, reporting your payments helps boost your credit and build a positive payment history.
Keeping up with payments on the personal loan is critical since it proves to lenders your ability to manage your credit reports and keep your credit utilization ratio low. When calculating credit scores, FICO and VantageScore companies pay attention to your payment history. Typically, your on-time monthly payment serves as a safety net for the lender who is taking a risk on you if you have no credit history or a poor credit score.
Things to Consider Before Building Your Credit with a Personal Loan
Borrowing a personal loan to build credit may seem a perfect solution, but don’t be irrational. Assess your risks and see the odds of getting a loan with a low credit score. Here is what you need to know:
Bad Credit Personal Loans May Have High-Interest Rates
Using a personal loan to build credit is quite simple, but it may come with high-interest charges. Lenders might report your payments to those three credit bureaus, but they will charge an irrationally high-interest rate that could exceed 36%. For example, an unsecured personal loan for bad credit differs from traditional personal loans from a bank or credit union. You must ensure you shop around and get the best personal loan offer. Consider unsecured personal loans only as a last resort if you don’t find a suitable alternative.
Not All Personal Loan Lenders Report Your Timely Payments to Three Major Credit Bureaus
Only some lenders report your monthly payments to credit companies. It means even if you borrow a personal loan or a credit card and keep your credit mix different, it won’t improve your credit scores. That’s why we suggest you apply for a reasonable loan amount with a lender that reports your successes to TransUnion, Equifax, and Experian.
Late or Missed Payments May Affect Your Credit in the Long Term
If you’re unsure you can repay the debt during the set loan term, your late payments will be reported, which could affect your credit. Life is unpredictable, and you can’t always be sure when personal finance will suffer. Maybe you’ll need your savings account to correct the situation, but it’s impossible. That’s why you must assess your financial possibilities before applying for credit builder loans.
Short-Term Loans May Be Lead to Debt Cycle
For example, payday loans may affect personal finance if you can’t repay them on time and request a rollover. Plus, payday loan lenders don’t report your payments to credit reporting bureaus. It happens because payday cash loans are paid with a lump sum, not fixed installments.
Personal Loans Alternatives to Build Your Credit Score
Bad credit borrowers shouldn’t get upset about their financial issues because they can use several alternative options to solve them. 1F Cash Advances suggests the following:
Don’t Close Old Credit Accounts
The older the credit accounts, the better your credit history. Lenders will check your credit accounts you didn’t use. In this case, they will improve your credit profile and make lenders see you as a responsible borrower.
Credit Builder Loans
A credit builder loan holds your borrowed amount in your savings account, which is easier to get than a traditional personal loan. These loans are an excellent solution to improve your credit score. You can get from $300 to $1,000 with a maximum term of 24 months. Their annual percentage rate will vary by lender.
Credit Cards
If you’ve never had trouble using a personal loan to pay your credit card debt, it can be worth acquiring one to start building or rebuilding your credit history. However, depending on your circumstances, you may be limited in your options.
If you have no credit or limited credit history, you may be eligible for an unsecured credit card or a student credit card if you are enrolled in school. If you are still looking for something other than those choices, you may be able to obtain a secured credit card. As collateral, some cards demand a security deposit. However, some cards allow you to eventually receive that amount back and change to an unsecured card.
Where Can You Get a Loan to Build Credit?
Searching for a particular loan amount to improve your credit is challenging when you don’t know where to find it. 1F Cash Advance will ease your mission and provide several places to get a loan to build your credit history.
Online Lenders
As mentioned above, not all online loan providers report your credit mix to the major credit companies. So, search for lenders that collaborate with these bureaus and apply through them. With our lending partners, you can improve your credit history and enjoy lower interest charges.
Credit Unions and Community Banks
Getting credit builder loans from banks or credit unions will help you increase your chances of obtaining a better credit score. However, it can be challenging because some traditional financial institutions may have more demanding requirements. However, you may get discounts and more flexible offers for a credit builder loan with small community banks.
Lending Circle Programs
By borrowing from your friends or family, you can use a credit-building plan offered through lending circles. Some non-profit organizations may help you report the payments of your credit builder loan to credit companies and improve your credit score. Their financial products are called “social” loans, but their availability is limited. Ask your community administrators for more information.
Community Development Financial Institutions
Such institutions help low-income communities overcome their financial problems by lending credit builder loans with more flexible repayment terms. In the US, there are more than 1,500 companies. They check how much debt you have on your credit cards and assess your possibilities for getting an efficient debt consolidation plan.
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