Credit is something that you take from a lender at an agreed rate of interest. It could be taken for various purposes but it is not always that banks will approve your credit. The chances of getting credit depend more or less on your credit score.
The quality of your credit score is defined by your bank account and financial transactions among other things. A credit score is the score or rank given by credible companies or financial institutions wherein they analyze the client’s credit history. Based on this, a customer gets a credit score and helps the lender know the creditworthiness of the borrower.
Consequently, this score determines the level of difficulty that you might face in availing a loan in the future. The better the credit score, the better the chances of getting your loan cleared with ease. Additionally, a bad credit score can keep you from accessing a line of credit to buy your dream home, finance your education or even land a good job. Therefore, it is mandatory to build a good credit score.
Herein, we are trying to help you by giving a comprehensive credit builder loan guide because getting a good credit score requires time to build. This credit builder guide seeks to provide you a glimpse of how credit scores are determined, what is credit building, what are the different things to keep in mind to build a credit score, some quick tips to evaluate your credit history and many more.
Table of Contents
How is credit score determined?
A credit score is determined by factoring in multiple variables. Some of them are as follows:
It takes into consideration how well you are able to repay or have repaid your debt.
Analyses the credit discipline that you maintain in your financial books.
Go into your credit card history and look for patterns.
What is credit building?
A credit builder process is the one wherein certain cautious steps are taken to increase the credit score. It builds your credit profile brick by brick and tries to plug out loopholes if any in the previous credit history.
Moreover, if you have never taken any loan or credit in this lifetime till now then the credit analysts do not have any history to look into. Therefore, they cannot decide your ability to repay the debt or credit on time. Hence, credit builder ensures that your profile is well maintained in this case too.
Thus, it is designed to help people who have bad credit scores or who have no credit history built with themselves and don’t have any knowledge on how to improve credit score uk. One of the credit builders exercise is the credit builder loan which does not require any prior credit history to avail and helps in building the score. It just requires a good income or repayment capacity.
Why is credit building necessary?
A person applies for a loan to buy a new product or repay the existing debt. Therefore, the situation is grave when the credit is demanded by any financial institution. In this situation, it is necessary to have a good credit score otherwise it can lead to adverse consequences. Hence, credit building is necessary because:
Banks or financial institutions can outrightly deny your claim for the loan due to a low credit score.
A high-interest rate is charged from the person as the chances of non-repayment increases due to low credit history. This is charged to keep a safety buffer.
A long gestation period loan is denied to the person due to the bank’s own safety policy.
What are some tips for credit building?
Some of the tips or steps that you need to take into consideration to start building your credit score are:
The first step to getting a credit score is to apply for a credit and then build the profile accordingly. In this, credit builder loans can be used to start the credit journey and then make timely repayments of it to score better.
Stay within your credit card limit. Be it your credit card or any loan taken, it is better to avoid spending more than the limit. This depicts that you are not “credit hungry” and are a responsible user. As sometimes expenses done beyond the limit can lead to a mismatch between income and repayment capacity.
Repay your loan and do not default on them to build your credit score. Moreover, it also defines your credit discipline and future chances of surviving a credit.
Monitor your joint accounts as any default by one of the members can hamper your credit score too.
Not using the credit card that you have recently taken can be a problem because once you have a credit card, it goes without saying that it needs to be used. It helps in showcasing that you are capable of meeting your credits.
Don’t apply for a high amount of loan when in need and keep it in moderation. Because a loan of the high amount can depict that your income is not sufficient to manage your expenses. Make an informed decision before deciding the loan amount.
Keep a constant and timely check on your credit profile. Any negation in this step can affect the credit score poorly.
What are the ways that can be used as credit builders?
Credit builders are varied in number. Some of the ways that are classified as credit builders are:
Credit builder loans
These are the loans that can be taken without any credit history. Banks provide these loans to new customers to build their credit profile along with lending the money to them. Under this loan, the banks keep the amount in a bank account while you make the payments.
In this type of credit-building exercise, the bank freezes your money in the bank account and keeps it as a collateral. And later this is released only when you repay your loan amount fully. This keeps your credit profile in check. So if you have funds at a financial institution then it may be worth asking if you can borrow money on that funds or not.
Secured credit cards
These credit cards require a certain amount of security deposit to be kept with the bank so that if you have increased your spending then it can balance with the security deposit. Thus, it saves your credit score from going bad.
In a nutshell, these credit builders are extremely helpful in bringing back your credit score to an acceptable range. With all the above available options, you need to pick the best fit for yourself and get your score building.