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Home›Finance Debt›Could A Homeowner Loan Be The Way To Improve Your Credit Score?

Could A Homeowner Loan Be The Way To Improve Your Credit Score?

By Rogers Jennifer
May 4, 2021
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Trying to create credit can be a challenge. This is especially true if you don’t have a history of credit or bad credit and can’t get a loan. Your payment history is one of the most important parts of your credit score. If you can’t get approved to borrow, you can’t improve your score and show that you’ll be responsible for paying off your debts.

There are different ways to access credit so you can start showing lenders you can trust. One of the best options, however, is a home builder loan. Here’s why.

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What is a credit loan and how does it help you improve your credit score?

Credit unions and some banks offer loans to credit builders. They work differently from traditional personal loans.

With a traditional loan, you get the money upfront from a lender after you have been approved to borrow. Once you have the money, you start making monthly payments to your lender. You repay the principal (amount borrowed) as well as the interest accrued on the loan. But if you don’t pay back the full amount, the lender loses the money and has to try to collect it.

Lenders don’t like to give traditional loans to people with bad or no credit because they think the risk of you not paying is too high.

A credit builder loan, however, involves a different process. You will apply for the loan and start making payments after approval. However, you will not get the borrowed money up front. Instead, it is deposited by the lender into a bank account under their control.

Once you have made the full payments due on the loan, so you will have access to the funds that you have borrowed. In other words, you get approval for a loan first, but you pay it off before you get the proceeds.

This type of loan does not work well when you have to borrow money to finance a purchase you cannot afford. But it’s great for building credit because you develop a positive payment history; loans are easy to obtain since the lender does not take any risk; and you save money in the process.

Homeowner loans can be a good alternative to secured credit cards. You don’t tie up money indefinitely, like you would when depositing money as collateral to ensure a secure card. Once you finish paying off the credit loan, you get the money you paid. You can use this money for anything you want, including transferring it to an emergency fund or a savings account for big purchases.

Credit loans are also reported to the credit bureaus and appear on your credit history as installment loans. Credit cards, on the other hand, are revolving debt. It is good to have a mix of different types of loans on your credit report so that lenders can see you paying off various types of debt responsibly.

If you’re trying to create credit, see if your local credit union or community bank offers a credit loan. If they do, consider requesting it. It can help you get a credit score that can open all kinds of doors for you.

And for more options, take a look at our resources to help you increase your credit score.

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