My credit score is very low. I have no credit history other than recent hospital bills on my credit report. I get denied for everything: bank loans, car loans, and credit cards. How do I establish credit and build my credit history if I can't get approved for anything? I have heard of a credit builder loan, should I try that?
When people mention "credit builder" loans, they may be referring to more than one type of account. Not all accounts marketed for the purpose of building credit work the same way, and it's important to understand the differences before you apply.
Some credit unions may offer small personal loans to individuals who have less than stellar credit, provided they are able to show financial stability in other ways. In order to qualify, applicants may need to show that they have stable employment and residential history. They may also be required to be credit union members in good standing.
Using a Personal Loan or "Credit Builder Loan" to Build Credit
Lenders may offer both secured and unsecured loans that can help those who are trying to build or rebuild their credit history.
With a traditional unsecured loan, the interest rate may be high, but some loans may come with an agreement that interest will be refunded if all payments are made on time and the loan is paid in full.
With a secured loan, the amount of the loan is backed by collateral, such as an individual's savings account or vehicle. Because the loan is secured, it may be easier to qualify for, and the interest rate may be substantially lower.
With one option, perhaps the one most commonly referred to by the term "credit builder loan," the lender places the loan funds in a savings account while the borrower makes payments on it. Like other secured loans, the interest rate may be much lower than with an unsecured loan. However, the savings account typically cannot be accessed until after the loan is paid in full.
Although each of these options may be beneficial for someone trying to build credit, it's important to research both the type of loan being offered as well the lender offering the loan to make sure the account is legitimate.
You will also want to inquire to make sure that the lender will report the account to Experian or the other national credit reporting agencies. In order for an account to help you build credit, it must first be reported to the credit reporting agencies.
Other Options for Rebuilding Your Credit History
Aside from a credit builder loan, there are several other options that can help you rebuild your credit history, such as:
- Paying off past due accounts. You mentioned that you have no credit aside from past due medical bills. Your payment history is the single most important factor in credit scores, and collection accounts are one of the most negative things you can have on your credit report.
It will be difficult to be approved for traditional credit accounts with unpaid medical collections in your credit history.
Although paying off your collection accounts will not remove them from your report immediately, a paid collection is usually viewed more positively than an unpaid one. Some credit scoring models no longer count medical collections once they are paid in full, so paying off your medical bills can help your credit scores right away.
- Applying for a secured credit card. Even if you are declined for a traditional credit card, you may be able to open a secured card. The issuing bank will require that you make a deposit into a bank account, such as a checking account or even an interest bearing account such as a savings account or CD. The credit card limit will be tied to the deposit in the account. That "secures," or protects the bank, if you do not repay the charges you make. Secured cards usually have a small credit limit.
You can use the secured card the same way as a traditional card, charging small amounts and paying your balance in full each month. Over time, if you are able to demonstrate responsible use of the card with your on-time payments, the bank may be willing to convert the card over to a regular, unsecured, credit card account.
Most banks report secured cards to the credit reporting agencies, so you may be able to use the account to begin building credit right away. Issuers for secured credit cards may also not require a credit check, making it easier to get approved.
- Asking a family member to add you to their credit card account as a joint account holder or an authorized user. Responsibility for making payments would be on each account holder in a joint account, and any late payments would negatively impact each account holder.
Authorized users are not responsible for making payments, but will still have access to use the account. Although both options can help you begin building credit, not all creditors report authorized user accounts to the credit reporting agencies, so you may want to ask before being added to the account.
Thanks for asking,
The "Ask Experian" Team