Your credit score changes as a result of every loan that you take out and every payment that you make, pay late or fail to pay.
This is because almost all lenders report your progress on paying back the loan to credit reporting agencies. As a result, your credit score will improve if you get a loan that you know you’ll be able to pay off.
The Risks of Borrowing Money to Build Credit
If you do not pay back a loan that you take out, your credit score will decline. This is true whether it’s a car loan, bank loan, or an alternative to payday loans online.
Luckily, there are ways to prevent this from happening. The most important thing to do is to create a budget. Your budget should include all of your expenses and all sources of income. In addition, you should never choose a loan with an adjustable interest rate.
If you choose to get a credit card to improve your credit score, it’s important to be especially aware of the risk of overspending. Many people find that they are more likely to overspend if their purchases are made on a card rather than with cash.
How to Borrow Money to Improve Your Credit Score
While there are many types of loans that you can use to build a credit score, the following are some of the best types of loans for building credit:
Credit builder loans are ones which can help you, the borrower, increase your credit score and build more of a financial profile which is most attractive to lenders in the long-term.
There are different types of credit builder loans, a few of the main ones include a pure credit builder loan, a secured loan, or an unsecured loan.
A pure credit builder loan is an agreement for you to make payments to a bank when they add funding to a locked savings account. As described by money under 30, its “like a savings layaway plan.”
Other common types of loans which are used to build credit are personal loans that are either secured or unsecured.
A secured loan is one you obtain by leveraging the money you already have, likely in a savings account. These funds don’t become available until he money is paid back which helps people build savings.
An unsecured loan is where you take the money and are free to use it for whatever you want, with an agreement to pay it back at a set rate and within a structured timetable. This is a lot like credit because you do have to make monthly payments back on your unsecured loan.
If that isn’t an issue based on your income or savings you are willing to pay back into the loan for a credit score boost, the unsecured loan can push your credit score towards an upward trend.
Loans for People With No Credit or Bad Credit
While your loan options are limited if you have bad credit or no credit, there are many ways that you can get a loan even if you have bad credit or no credit.
Some loans are specifically marketed to people with bad credit or no credit, and these loans are often called fresh start loans or starting over loans.
In most cases, they are not widely advertised. Here are some tips for finding a credit builder loan if you have bad credit:
- If you are part of a credit union, ask them if they offer any loans to people with bad credit or no credit.
- Ask about fresh start loans at your local bank.
- Look for CDFIs (community development financial institutions). These organizations are designed to help lower-income communities, and there are more than 1,000 of them in the United States.
- Determine if there is a lending circles program in your area, otherwise known as peer-to-peer lending options. Loans from lending circle programs are interest-free.
- Consider a Secured Loans: Secured loans are often available with no credit or bad credit. However, you have to list collateral such as real estate or a motor vehicle. It’s even possible to get secured credit cards, and secured loans often feature a lower interest rate than unsecured loans.
If you have debt that you’re unable to pay off, this will continue to lower your credit score over time. Luckily, you might be able to lower your monthly payments with debt consolidation.
Debt consolidation is when you get a sizeable loan that is used to pay off all of the outstanding debt that you have. While you will still have to pay this loan off, the interest rate on the debt consolidation loan will be lower than the loans you were initially making payments on.
As a result, there’s a good chance that you’ll be able to consistently make the payments on time and improve your credit score.