These loans aim to help borrowers build a credit history
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.
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.