The #1 Myth running wild out there about building credit is that you need a credit card or car note to build........................
If you finished that sentence with the word CREDIT you are correct, if you believe that myth you are soooooooo wrong. Building your credit score does not always mean that you have to get into debt!! But in order to meet our financial goals we must bite the bullet and learn how to work with the system to improve our chance of becoming a qualified borrower the banks can trust....
I've talked about some credit tips in the past; such as paying all of your current payments on time, keeping debt on credit cards at less than 1/3rd of your available credit limit, and limiting how often you apply for new credit. It's also important to know what makes up your score and what is on your credit report so you can fight any untrue claims.
Today, we're going to dive into Credit Builder Programs. Using these incredible tools may be a good way for you to get positive activity on your credit report and build your score by having a good trade line on your credit report as you save money and avoid getting into debt.
What is a Credit Builder Program?
A Credit Builder Program, is a small loan and savings program provided by some credit unions and banks that can help to boost your credit. The bank or credit union gives you a loan and puts the money into a savings account, you make monthly payments, and after 12-18 months the money in savings is released and they pay you interest on having it saved the whole time (like a Certificate of Deposit, or CD). Check first with your bank or credit union to see if they offer such a program. It's not a bad idea to compare multiple options since different lending institutions have different qualifications and will likely give you different interest rates and minimum monthly savings amounts.
Here are a few credit builder programs you can compare alongside your bank's programs.
Credit Builder Loan Programs
According to Self-Help Federal Credit Union, their Fresh Start Loan "can help to build or repair your existing credit history with a strong potential of approval, regardless of previous financial challenges. Loan amounts range from $500-$2,000 with terms of 6-24 months. After approval, the funds go into a limited-access savings account, which will earn interest. The repayments include both principal and interest and are reported to all three credit agencies. Once the loan is paid in full, the borrower receives the full amount of the loan PLUS the interest earned. Additionally, Self-Help Federal Credit Union offers free financial coaching to its members, which greatly enhances the entire credit repair process."
For Pyramax Bank, with their Build Your Credit program "the individual would apply for a loan amount of $900-$5000 depending on their debt to income. They then open a Savings Account. The amount to open the Savings Account depends on the loan amount. The funds from the loan are then placed into the Savings Account, which is then locked until they complete the payments for the loan. Once the loan is paid off the funds are released. The clients not only built their credit, but now they have a Savings Account with funds as well. The interest rate [you earn on your savings] is 3.25% currently."
For BMO Harris Bank, they use "a CD to secure the funds of your credit builder loan, and you would make your monthly principal and interest payments on the loan." Speak with a banker to apply and "if you are approved, the amount you apply for is placed in a CD with a hold on it. At the end of the term, the funds get released to you. The minimum term is 1 year, and can go up to 3." "The balance does accrue interest, but you are also paying interest on the loan (which is generally greater than then interest you are accruing)." "The credit build loan payments will be reported to all of the major credit reporting agencies."
For Educators Credit Union, their "guidelines for lending are normally your monthly bills cannot total more than 52% of your monthly income. We look for timely payment history with all creditors and no bankruptcies in the last 2 years. Members who have collections or judgments on their credit reports will have an opportunity to apply for the Credit Re-Builder Loan to pay off those past due debts. The goal of the program is to provide our members the tools, assistance, knowledge and resources to gain control over their personal finances. The maximum amount is $2,000 and the maximum term is 36 months. The members applying must be employed for a minimum of 1 year with the same employer."
Call around to other banks and credit unions to compare your options. Meet with a couple of bankers to discuss your situation and get their recommendations. Part of Strong Blocks 21-month rent to own program is for families to live in the home they plan to buy as renter but with a right to purchase it at a fixed price. During the term, you work with Strong Blocks team and network to improve your credit and personal finances. Sometimes a credit builder program will be recommended.
Are There Other Options?
While a Credit Builder Program is a LOT better than a secured credit card, a Secured Credit Card could be the right option for some people. It differs from the typically unsecured types of credit cards that we are use to. Instead of paying after you have spent the money, you provide the cash for your line of credit up front. This eliminates the risk to the lender and limits the possibility of you getting into debt. The activity on these cards is usually reported to the three major credit bureaus, but again double check with the credit card provider to be sure. For this method to work best: make your payments on time, all the time, and make sure to use only up to 30% of your limit for the greatest success. Most secure cards come with small limits therefore if you leave a balance over 1/3 of the credit limit your score could drop. To get the best use of building your credit score, after using the secure card for a purchase, pay the balance in full each month...or just avoid these altogether and keep it simple with a credit builder program described above.
You can find secured credit cards at different financial institutions such as banks and credit unions, and through credit card companies. But do your research and compare at least 3 cards as well as reading the fine print on the one you choose: the fees may vary drastically between cards! Be patient and diligent, and sticking with it will be the most important factor in positively affecting your credit.
Want to own a home but don't quite have the credit needed to qualify for a loan?
Strong Blocks operates a rent to own program that helps to put families into remodeled homes while they continue to work on their credit and personal finances. While you rent you also work to qualify for the loan you need to buy it. To learn more, click the button below:
Written by Coretta Herring, Pathways to Financial Empowerment
Coretta Herring is Financial Coach for Pathways to Financial Empowerment and Real Estate Agent for Any House Realty. Prior to that she worked for Keller Williams and ACTS Housing serving as a counselor helping individuals renting properties owned by the City of Milwaukee transition into homeowners. Coretta has more than 13 years of credit counseling experience, serving, most recently, as the Financial Opportunity Center Program Manager for Riverworks Development Corporation. Corretta previously worked for the City of Milwaukee Neighborhood Improvement Development Corporation as a Community Outreach Liaison and, for a decade, at the Boys & Girls Clubs of Greater Milwaukee, most recently as the Family Service Director. She has a Bachelor of Arts degree from Upper Iowa University. Many years prior to joining ACTS, Coretta purchased a home through ACTS in the ACTS North neighborhood, where she currently resides. You can email her at pathways2financial@gmail.com
