Not for some­body who needs cash to­mor­row

The Buffalo News - - MON­EYSMART - What sort of in­ter­est rates do credit-builder loans charge? Is there a down­side to credit-builder loans? Are there other prod­ucts that can help build or re­pair credit?

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:

Ques­tion:

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.

Q:

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.”

Q:

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.

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