These loans aim to help bor­row­ers build a credit his­tory

The Buffalo News - - REAL ESTATE NEWS - By Ann Car­rns

Credit unions and com­mu­nity banks helped pioneer “credit-builder” loans that al­low cus­tomers to es­tab­lish credit his­to­ries and to be­gin grow­ing their sav­ings. Now, some star­tups are mak­ing sim­i­lar loans more widely avail­able, us­ing dig­i­tal tech­nol­ogy.

Fi­nan­cial tech­nol­ogy companies of­fer­ing the on­line loans in­clude Self Lender, which works with sev­eral banks, and Credit Strong, cre­ated as a divi­sion of Austin Cap­i­tal Bank. Both companies are based in Austin, Texas.

The loans tie bor­row­ing to forced sav­ings. Cus­tomers typ­i­cally re­ceive a rel­a­tively small loan – say, $1,000 – and agree to have the money set aside in a spe­cial sav­ings ac­count. The money stays there while the bor­rower pays off the loan in monthly in­stall­ments, typ­i­cally over a year or two.

Once the loan is fully re­paid, the sav­ings ac­count is “un­locked,” and the bor­rower is given ac­cess to the money, plus any in­ter­est earned. The loan pay­ments are re­ported to the ma­jor credit bu­reaus, help­ing to es­tab­lish a credit his­tory that can then en­able the bor­rower to qual­ify for more tra­di­tional loans and credit cards.

“Our cus­tomers think of it as a sav­ings app that builds credit,” said James Gar­vey, co-founder and chief executive of Self Lender.

The goal, the lenders say, is to en­able peo­ple with no or low credit scores to build credit his­to­ries, while also help­ing them set aside money for un­ex­pected ex­penses.

The Con­sumer Fi­nan­cial Credit

is up­dated with the three credit re­port­ing agen­cies – Equifax, Tran­sUnion, and Ex­pe­rian.

Pay­ing off your small­est ac­count may help your credit scores in two ways. First, it will bring your per­card utiliza­tion down to zero per­cent. Sec­ond, it will lower your to­tal or ag­gre­gate re­volv­ing utiliza­tion as well.

Why pay­ing off debt this way is a good ap­proach

If you pay off your debt in a way that helps to im­prove your credit score the fastest, you may be able to un­lock some great ben­e­fits such as:

•Bet­ter in­ter­est rates and terms on fu­ture fi­nanc­ing

•Have an eas­ier time qual­i­fy­ing for fu­ture loans, credit cards and ser­vices • Lower in­sur­ance pre­mi­ums Of course, in ad­di­tion to the po­ten­tial for credit im­prove­ment, pay­ing down your credit card debt can save you money on in­ter­est. With the aver­age credit card in­ter­est rate hov­er­ing some­where around 17.80 per­cent, that sav­ings can add up quickly.

Op­tion two:

Al­though it’s im­por­tant to pay down debt that hurts your credit score as soon as pos­si­ble, there are some ex­cep­tions to that rule. For ex­am­ple, if you’re pay­ing an ex­tremely high in­ter­est rate on a per­sonal loan, it might be in your best in­ter­est to get rid of that debt first.

If you wish to pay off the debt that is cost­ing you the most money each month, take some time to track down and write out all your in­ter­est rates. Once you have your list, or­der the in­ter­est rates you’re pay­ing from the largest to the small­est.

Un­like the strat­egy used for pay­ing down debt to im­prove your credit scores, you will start from the top and work your way down. This ap­proach has the po­ten­tial to save the most money on in­ter­est.

There’s no bad way to pay off debt

If you’re strug­gling to fig­ure out which debts you should pay down with your tax re­fund, take a mo­ment to re­lax. The truth is there’s usu­ally no bad way to pay down debt.

Pay­ing down any debt has the po­ten­tial to save you money on in­ter­est and make more room in your monthly bud­get for sav­ing, in­vest­ing, and other smart fi­nan­cial moves. If you’re able to pay down your debt in a man­ner which also im­proves your credit scores, you’ll just get a lit­tle more bang for your buck.

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