We are all aware of the importance of having a stellar credit score. But not all of us make sincere efforts to maintain a good credit score. And when it’s time to take credit, we are denied a loan or can’t secure a competitive interest rate. And this is the worst part- one can’t qualify for a credit card without a good credit score, but one can’t build their credit score without getting a credit card. Sound complicated, right?
Fortunately, there are alternatives to building a good credit score and even securing loans.
Credit builder loans and credit cards for bad credit are some financial solutions designed for people who wish to build their credit score or improve their credit history.
In this blog, we have discussed both options so you can make an informed decision when picking one solution.
What Is a Credit Builder Card?
A credit builder or secured credit card is an excellent option for people with a poor credit history or no credit score. With secured credit cards, users can rebuild their credit score and eventually apply for a standard card or loan later.
A secured credit card works differently than a traditional credit card. When you apply for a secured credit card, you will have to deposit a security amount. This amount is refundable. Generally, the security deposit is equivalent to the credit limit you will have on your card. Some card issuers offer a higher credit limit than the security deposit, while some increase the credit limit over time. You can lose your security deposit if you fail to make timely repayments. Also, it can have harmful consequences on your credit score.
Compared to traditional credit cards, credit cards for bad credit have high-interest rates. Your credit score will eventually improve if you’re careful about optimally managing your credit limit and making timely repayments.
What Is a Credit-Builder Loan?
A credit-builder loan is another great option to build or rebuild a credit score.
We all know how traditional loan works, right?
We borrow a sum of the amount from a lender at a said interest rate for a certain period. At the end of the term, you will have repaid the loan amount with interest.
With a credit-builder loan, you don’t actually get a loan. Confused?
Credit-builder loans are a financial product designed to build your credit and save money.
If you are approved for a credit-builder loan, you commit to paying a certain amount to the credit-building loan company each month till the duration of your loan term.
Unlike a traditional loan, you make monthly payments to the lender instead of receiving funds. If your loan term is 12 months, you will have to pay the settled amount to the company for 12 months. At the end of the loan term, you will receive the full amount, along with interest accrued on the money deposited.
So, the question is, how does it help in building credit scores? Here is how.
When you pay the loan company monthly, the transaction gets recorded and reported to credit reference agencies. When credit reference agencies see you are regular with your monthly payments, they will consider you creditworthy and improve your credit score.
Which Option Is Best?
As seen above, both credit cards for bad credit and credit-builder loan options are best for people looking for practical ways to improve their credit score.
However, choosing between the two can be daunting.
Your choice will depend upon your financial condition, needs, and goals.
The credit-builder loan will be your best option if you want to build your credit score while saving money. Besides this, credit-builder loans don’t require stringent credit checks and security deposits. Once the loan term ends, you get the accumulated amount along with the interest.
If you require credit while improving your credit score, credit cards for bad credit are your best option. These credit cards allow one to take out monthly credit and make easy repayments. The credit reference agencies will see that you have easy access to credit and can manage your credit without incurring any late payment fees. This will ultimately improve your credit score.