Not for somebody who needs cash tomorrow
Bureau has estimated that 45 million people have no credit history or histories too thin to produce a credit score. People who are low-income, younger, black or Hispanic are more likely to be credit “invisible,” the bureau found.
Credit Strong says borrowers who successfully repay a loan will typically see a 40-point increase in their credit score, while someone without sufficient credit history will typically go from having no score to one in the mid-600s. According to credit bureau Experian, that level is considered “fair” under the FICO model; scores of 670 or above are considered “good.”
Many Americans also struggle to save for financial road bumps. The Federal Reserve reported that 40 percent of American adults said they couldn’t come up with $400 in cash to meet an unexpected expense. Without a pool of emergency money, people may have to turn to sources like payday or car-title lenders – short-term, high-cost loans that can trap borrowers in a cycle of debt.
“Folks spend what they make, and maybe more,” said Mike Lord, chief executive of the North Carolina State Employees’ Credit Union, which for years has offered creditbuilder loans to its members to help them avoid payday lenders.
Credit-builder loans offered by many credit unions typically make at least some of the money available right away, since borrowers are often seeking the loan because of a cash crunch.
“They need cash now,” said Ann Solomon, vice president of strategic initiatives at Inclusiv, a nonprofit that assists credit unions serving low-income neighborhoods.
Funds borrowed through startups like Credit Strong, however, aren’t available immediately and aren’t intended for emergencies. Rather, they’re to help build savings for expenses down the road. “This is not for somebody who needs cash tomorrow,” said Erik Beguin, chief executive and president of Austin Capital Bank.
Typically, customers pay a modest upfront fee as well as paying interest on the loan. The savings account (or, in the case of Self Lender, a certificate of deposit) is held at a bank that’s insured by the Federal Deposit Insurance Corp., earning minimal interest.
Borrowers must be at least 18 and have a debit card or bank account to make loan payments. The startups don’t check credit scores, as would happen with a traditional loan, but they do take steps to verify a borrower’s identity and to screen for fraud. Self Lender reviews an applicant’s history with ChexSystems, which can flag a pattern of trouble with bank accounts. Credit Strong says that it doesn’t disclose details of its review process because of “competitive and security reasons,” but ChexSystems “will not adversely affect approval” of applicants.
Self Lender is available nationwide. Credit Strong is currently available in all states except North Carolina, Vermont and Wisconsin.
Here are some questions and answers about creditbuilder loans:
Answer: Rates are typically double-digit – higher than the rate on a secured loan like a mortgage, but lower than some credit card rates. According to Credit Strong, someone borrowing $495 over 12 months would pay $44 a month plus a one-time $8.95 fee, at an annual percentage rate of just under 16 percent. At the end of the loan term, the borrower would have $495 in the savings account, plus any accrued interest. In contrast, rates on payday loans are often triple-digit.
A: There can be if you don’t pay back the loan on time. Late payments will incur fees, and you may be reported to the credit bureaus. “If you use it but don’t pay on time,” Garvey said, “you’re going to establish a credit history, but not the kind you want.”
A: Secured credit cards are another option for people with marred or scant credit. Customers make a deposit at a bank or credit union, which secures a line of credit. Then, as they use the card and pay off balances each month, the payments are reported to credit bureaus.