Credit Builder Loan: A Loan That Works Backwords

March 30, 2021CreditBy toptierfinancial

Often people who need a loan are either short on cash or have immediate needs to be met. If that is the case for you, we recommend talking to a nonprofit credit counselor. If you are looking for a way to build credit or improve your credit score, we have a safe way for you to do that.

What if I told you there is a very popular loan product that does not let you access the cash until the end?  You might wonder, “What is the purpose if you can’t access the money right away?” The purpose is in the name—Credit Builder Loan. If you need to build a positive credit profile, this product can help.

Whether we like it or not, a good credit history is crucial in today’s economy. Far more than just a number, a good credit score is a prerequisite for accessing everyday financial products like a credit card, a personal loan or auto financing.  However, those with no credit history or a poor credit score have limited prospects. The task of establishing credit can be an unyielding catch-22: without credit, it is hard to get credit.

However, more and more nonprofit lenders and credit unions across the country are seeking to shift this restrictive paradigm by offering small dollar Credit Builder Loans (CBLs) that allow individuals to begin to build on-time payment history, with minimal risk and at a rate that is affordable and accessible to them. CBLs are designed to help consumers with no or thin credit files, or those with low scores but minimal outstanding current delinquencies, to establish and (re)build their credit histories and scores.

These small consumer loans are generally made using alternative underwriting criteria to assess borrowers’ ability and likelihood to repay. Which means if your credit report has no information or only negative information, you will not automatically be declined. Credit Builder Loans are unique in that they are purely for credit building purposes. The funds are secured in a restricted account by the lender and no money is exchanged up front. So, it functions like a backwards loan—you get the money at the end and not at the beginning.

The security, released when the loan is repaid, can often serve a second purpose of savings accumulation. The diagram below shows a typical version of the lending process.

Although terms (e.g. interest rates, fees, length, amount, etc.) may differ, CBLs are generally small dollar installment loans with terms ranging from 12 to 24 months. Some providers incentivize the loan program by matching the loan proceeds at maturity. To fulfill the core purpose of the loan, providers of CBLs must report complete payment histories on these loans to at least one major consumer reporting agency (CRA), such as Experian or TransUnion. Full reporting of payments enables borrowers to establish and build credit and better meet their financial goals.

How do you find a lender who offers a Credit Builder loan? One of the best consolidator sites can be found at a national non-profit called Credit Builders Alliance. This network of non-profit lenders and non-profits who are involved in financial coaching and counseling has a searchable find a member section where you can search by type of financial product. Just select “Credit Builder Loan” and you will find lenders located throughout the country.

Don’t let your lack of a positive credit history stop you from accessing needed credit—consider a Credit Builder Loan.

 

About the Author: Dara Duguay is the CEO of the Credit Builders Alliance.

 

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Ask an Expert: Why don’t I have a perfect credit score?

August 29, 2020CreditBy toptierfinancial

Q. I have a credit score of 670. I don’t understand why it is so low. My wife and myself own a home with no mortgage. I have been employed by the same company since 1990. We have an emergency fund of $35,000. I carry a debit card from the bank we use. I have a best buy card but not used for 10 years. I have no other credit cards. My credit reports don’t have anything negative on them. One report didn’t show our current residence, and I am disputing that currently. So why is my credit score so low, I would think it should be near perfect?

Dear Reader,

You seem like a reliable borrower: you have no debts, a steady income, and even savings. Although all of these are an essential part of what lenders consider when issuing credit, they are not all taken into consideration to calculate your credit score.

Your credit score is calculated using data reported by your creditors to the credit bureaus. This data includes details about your financial behavior, such as credit card usage and payments. However, information about employment, marital status, or assets, like your savings account, does not affect your credit scores. Even an incorrect home address isn’t likely to affect your score. Credit bureaus use your home address to confirm your identity and to match information to you. Although it’s recommended to correct this kind of information, doing so won’t affect your score.

There several scoring models in the U.S. lending system. FICO is the most widely used scoring model, followed by VantageScore. We will be focusing on the FICO model, but keep in mind that the factors that influence both score models are more or less the same. FICO Scores takes into consideration the following to calculate your score:

1)         Payment history (whether you pay credit lines on time and as agreed)

2)         Utilization ratio (how much you owe compared to your available credit)

3)         Age of your credit (for how long have you had credit)

4)         Credit mix (the types of credit that you have)

5)         New credit (how often you ask for new credit lines)

From what you tell us, it looks like your credit reports have no current activity. You haven’t used your Best Buy card in a while, your mortgage is paid off, and you don’t have other credit cards or loans. Because you don’t have monthly financial activities, it’s likely that your score stays more or less the same. The score you have now may be associated with the age and payment history of your Best Buy credit card and your paid-off mortgage, assuming that it is still included in your credit reports. Positive information about your mortgage will remain on your credit report for seven years after you made your last payment. After that time passes, by law, it will be removed from your credit history.

A perfect credit score is challenging to achieve. Experian calculates that only 1.2% of Americans have a perfect score of 850. But you don’t need a perfect score to get credit with the best terms and interest rates. A score above 700 is considered good enough for that. And your current 670 score is considered a good score. But, if you want to improve your score, there are strategies to help you do so.

Your first step is to add monthly financial activity to your credit report. A good way to do so is to get a credit card. You don’t have to get into new debt; instead, you can use it to pay for some of things you currently pay for with your debit card. To get your first card, do some research. There are plenty of credit cards in the market with reward programs and benefits. Just focus on finding one that meets your needs and doesn’t have an annual fee. Your current bank may be an excellent place to start looking.

Once you get your credit card, you have to learn how to use it strategically: always pay on time and, if possible, pay in full to avoid accumulating interest. Also, make sure you use 30% or less of your available credit line. The credit building journey is different from all of us. You already have solid financial habits, and boosting your score should only be a matter of consistency and time. If you would like a more personalized credit review and plan to work on your score, it’s always best to talk to an NFCC Certified Financial Counselor who can take a look at your report and give you the right recommendations based on your circumstances. Good luck!

Sincerely, 

Bruce McClary, VP of Communications, NFCC

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Ask an Expert: How to Dispute Inaccurate Debt Collection Information on Your Credit Report

July 30, 2020CreditBy toptierfinancial

Question: I have an original debt dating back 8 years. I refused to pay the debt due to overcharging my account. A few years ago, my debt was sold to a debt collector, and they are now reporting to credit bureaus as deliquent. We have agreed to terms on the settlement under the conditions they remove it from my credit report completely. They said they will update it as settled.

My question is as follows I read that after 7 years (and 180 days) after the last payment was posted, a debt cannot be reported to my credit report, via original creditor, or the collection agency who bought my debt. If this is true, how can i get this removed? It’s only showing up as 4 years on my credit report due to the collection agency reporting the debt.

Dear Reader,

You are correct, charged-off accounts and collections will stay on your credit report for up to seven and a half years after the date of the last reported activity. In this case, it’s the date when your account became delinquent. Debt collectors cannot legally re-age an account just because they bought it from the original creditor or another collection agency. The only circumstance in which this could happen is if the collection became current because you resumed payments and then it became delinquent again. If that’s not your case and your debt is well over eight years old without any activity during that period, it should not be in your credit report.

Creditors or collectors are not allowed to report inaccurate information to your credit reports, and under the Fair Credit Reporting Act, you have a right to have it removed. To do so, you can start a dispute with each one of the credit bureaus, Equifax, Experian, and TransUnion. Your first step is to get copies of your credit reports to submit as part of your dispute process. You can get free copies of your credit reports once every 12 months at Annualcreditreport.com or request them from the credit bureaus for a fee.

Then, get ready to start the dispute process. You can file your dispute through the credit bureaus’ website, over the phone or by mail. The easiest and fastest way is to do it online. Whichever route you go, you will have to provide personal information, a description of the information that needs to be corrected, and documentation to back your claim. In your case, anything that documents the original delinquency date with the original debtor. Credit bureaus have 30 days to investigate your claim and provide you with a written resolution. If your claim is validated, they will also send you a copy of your updated credit report.

If the result is not what you were hoping for, reach out to the collection agency. Ask them to report the accurate delinquency date of your account to the credit bureaus and remove the collection account. You mentioned that they have agreed to report your account as settled, which is different than having it removed from your report. That just means that they are reporting that the account was paid for less than it was owed, which is not great, but it shouldn’t matter since the account should not be included in your report. Like the credit bureaus, the collection agency has 30 days to investigate and respond to your dispute.

Most disputes dealing with removing inaccurate information get resolved smoothly. Make sure you follow the steps and provide all the necessary documentation to back your claim. Having a negative account removed from your credit report can give you score a boost and help you get your credit ready to buy a house in the near future. Good luck!

Sincerely, 

Bruce McClary

 

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Ask an Expert: Should I cancel my credit card partial payment plans? Will it help my credit score?

June 19, 2020CreditBy toptierfinancial

Q. I have started the process of paying off credit card debt. It was suggested to me that I contact the credit card companies (more than 3) to work out a payment arrangement with a lower interest rate, in some cases zero percent interest. I have been on the plans for a few months now and all seems to be going great. However, I see the term “paying partial payment plan” on my credit report now for those cards. I have been reading the negative affect this has on credit. My question is what should I do about this? Will this go away once the balance is paid off? Should I try to reverse the payment plans in an effort to save my credit score?

Dear Reader,

Whenever you agree with your creditors to pay your credit cards for a lesser amount, they usually report it on your credit with a notification along the lines of paying with a “partial payment plan.” Having that notification on your credit report can affect your score negatively until you pay off your credit cards or exit the plans.

There several things that you can do to influence how your score is affected while you pay your debts. Keep in mind whatever strategy you choose will affect your credit. How much each specific action will affect your score negatively or positively depends on your current credit report and your history. So, before you decide, consider your current financial situation and determine how much you can pay on these cards.

If your creditors have not closed your accounts and you can make your original payments, contact your creditors and exit your plans. This could improve your score, but it will take you longer and cost you more to pay your debts off since you will no longer benefit from a 0% interest rate. If you have enough income, another alternative is to pay off your debts quickly and focus on rebuilding your credit and boosting your score afterward. When you pay your credit cards, make sure the creditors remove the “partial payment plan” notation from your credit reports. They should do it automatically, but it’s in your best interest to ensure they do so promptly.

If you can’t afford the original payments, consider enrolling in Debt Management Plan (DMP) through a nonprofit credit counseling agency. These programs are administered by the nonprofit and help you repay your debt in full, typically with lower monthly payments and interest rates. Whenever you pay your debts through a DMP, it’s reported as being paid through a debt counseling program. While this notification on your credit report does not negatively affect your credit score, enrolling on a DMP does because creditors close your accounts. Therefore, your utilization ratio increases and your score goes down.

DMPs may not be the best option for everyone and will not offer the instant credit relief you hope. It’s possible that your credit score may experience a temporary drop while you begin to repay your debt through one of these plans. In most cases, what negatively influences your score the most is not that you are enrolled in the plan or how it’s reported, but what led to this point. Being enrolled in a payment plan is preferable to facing out of control debt, which can lead to late or missed payments that can affect your score for 24 months.

Whatever path you take, there’s light at the end of the tunnel. Weigh your options and remember that this is only a temporary setback while you get out of debt. Building your credit and improving your score is a marathon, not a sprint. If you need additional help, talk to an NFCC-certified credit counselor from a nonprofit to find what repayment strategy can work best for you. Good luck!

Sincerely,

Bruce McClary, Vice President of Communications

Bruce McClary is the Vice President of Communications for the National Foundation for Credit Counseling® (NFCC®). Based in Washington, D.C., he provides marketing and media relations support for the NFCC and its member agencies serving all 50 states and Puerto Rico. Bruce is considered a subject matter expert and interfaces with the national media, serving as a primary representative for the organization. He has been a featured financial expert for the nation’s top news outlets, including USA Today, MSNBC, NBC News, The New York Times, the Wall Street Journal, CNN, MarketWatch, Fox Business, and hundreds of local media outlets from coast to coast.

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Ask an Expert: Is there anything I can do to fix accounts I settled in the past to help my credit so I can buy a house?

May 30, 2020CreditBy toptierfinancial

Question: I fell behind on credit card payments four years ago and settled a couple accounts for less than the full amount a little over 3 years ago, which I know now was not the wisest decision. My financial situation is much different today than it was but my credit score is still hurting. Is there any way to rectify these accounts and remove them? If I call the credit card companies, will they allow me to pay the amount that they wrote off in the settlement and change the status or am I stuck for four more years waiting in credit score limbo?

Dear Reader,

I understand your frustration. While you can’t change the past, you can focus on “actively” working to improve your score today and in the future.

Your credit report is a record of your monthly financial activity. So, you have the power to influence your score each month. To see your score improve, you will need a strategy, discipline, and patience because it takes time to see the results. The first step is to see what’s on your credit report to determine what you need to work on. Instead of relying on data from a simulation software, get copies of your actual reports. You can get free copies from each of the leading credit bureaus–Equifax, Experian, and TransUnion–from annualcreditreport.com every 12 months. If you want to know your score, you can purchase it directly from the credit bureaus, FICO, or get them free of charge from a reliable third party.

When you get your reports, review them carefully, and correct any mistakes if you find any. From what you tell me, it looks like your settled debts may be keeping your score down. Unfortunately, removing those accounts before they are scheduled to drop off is very difficult. In some cases, collectors offer to delete the collections or report settled debts as paid in full when they are trying to collect payment. Yet, the rules of credit reporting don’t always make it possible for those arrangements to succeed. Legally, credit bureaus have to report this information for up to seven years after the first delinquency was reported. Otherwise, collection accounts would be deleted regularly, resulting in inaccurate credit histories for many people.

In your situation, try asking creditors for a goodwill deletion. You can send them a letter appealing to their good nature instead of offering to pay the amount they already forgave. When you settled your accounts, your creditors agreed to consider that debt satisfied. Additional payments won’t improve your score; if anything, bringing old collections current may reset the clock on those accounts.

Assuming that you have positive credit activity every month on your credit report, the negative effect of your collections should be diminishing with time. Your credit reports prioritize current information over the old, so it’s critical you manage your credit effectively. If you haven’t, it’s time to do so. In general, having a good credit report includes maintaining a mix of credit cards and loans, paying on time, using 30% or less of your available credit in each card, and asking for new credit sparingly.

Without details about what’s on your credit report, it’s difficult to give you specific recommendations. You can always talk to an NFCC certified financial counselor to get personalized guidance. Your counselor will review your credit report and overall financial situation to help you find the right strategy to improve your score and get you mortgage-ready. You are already on the right track. Good luck!

Sincerely,

Bruce McClary, Vice President of Communications

Bruce McClary is the Vice President of Communications for the National Foundation for Credit Counseling® (NFCC®). Based in Washington, D.C., he provides marketing and media relations support for the NFCC and its member agencies serving all 50 states and Puerto Rico. Bruce is considered a subject matter expert and interfaces with the national media, serving as a primary representative for the organization. He has been a featured financial expert for the nation’s top news outlets, including USA Today, MSNBC, NBC News, The New York Times, the Wall Street Journal, CNN, MarketWatch, Fox Business, and hundreds of local media outlets from coast to coast.

 

 

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The Importance of Checking Your Credit Report During the COVID-19 Pandemic

May 6, 2020CreditBy toptierfinancial

The COVID-19 crisis has forced many of us to shift priorities. People are focused on taking care of their families, following social distancing measures, and making ends meet. That said, it is important to keep track on your financial situation, too. We have already discussed how to budget during COVID-19, but there’s another basic financial indicator you should be monitoring: your credit report. During a situation like the current national crisis it is easy to overlook your credit, and it is also a prime opportunity for scammers and identity thieves to prey on unsuspecting victims. You might not think you need great credit right now if you’re hunkering down and not making a big purchase like a house or car. But, you don’t want a small mistake now to haunt you later. Here is a closer look at how COVID-19 can impact your credit, and what you can do about it.

Why Your Credit Matters     

As a quick refresher, your credit report matters for a number of reasons. The most important reason is that your credit score is based on the data contained in your credit report. Therefore, keeping a good and accurate credit report will lead to a higher credit score than a credit report containing negative or inaccurate information.

A related reason for why you should check your credit report frequently is that many credit reports contain errors. An error could be minor, or it could affect your credit score. In a major 2012 study, the FTC determined that one in four consumers found errors in their reports that could affect their credit scores. In addition to finding simple errors, checking the report may reveal unauthorized credit use by someone pretending to be you. Therefore, checking your report could provide the opportunity to locate incorrect information and potentially increase your score—and it can even be a way to catch or prevent identity theft.

Checking the report can also be a way of tracking when certain negative marks will fall off the report, and ensuring that they fall off on time. This can be helpful when you are planning ahead for credit applications, such as before you buy a house. A periodic check of your credit is simply a smart financial move that will give you a better understanding of your financial situation.

How COVID-19 Can Affect Your Credit

Some commentators have compared COVID-19 to a natural disaster, and it poses similar threats to your credit. Just like if you were recovering from a major storm or were forced to relocate from a natural disaster, COVID-19 has probably forced you to shift priorities. Essentially, you’re focused on the things that matter most, like keeping your family safe. At best, this scenario makes it easy to let your guard down and become a little less organized. This could cause you to miss a payment to creditors, which could damage your score. Or, maybe you’ve been hit even harder by COVID-19, and have lost a job or experienced reduced hours and income at work. If so, you are not just facing a shift in priorities, but a shift in your ability to pay creditors. Again, this could impact your credit score.

If you have opted for a forbearance or deferment program, whether it is on student loans, rent or mortgage payments, or directly through another creditor, you need to check your credit report to make sure the agreement is properly reported. If a creditor reports a late payment in the midst of an agreed upon deferment, that would be a red flag and an error to dispute immediately. You will want to watch all accounts, but keep a particularly close eye on any accounts that you have made special arrangements for during COVID-19. Also, familiarize yourself with this guidance from the CFPB about how these accommodations are supposed to be reported by creditors.

Also, fraudsters are taking advantage of COVID-19. There has been an increase in scams, including fake websites, communications disguised as being from government agencies (especially related to “stimulus checks”), and fake job postings. You should be vigilant and take precautions not to fall for these tricks. One of your best defenses is to keep track of your credit report to ensure you catch any unauthorized activity right away.

Where to Check Your Report

One of the best places to get a free credit report has long been annualcreditreport.com. Normally, consumers have been able to access one free report from each major reporting agency—Equifax, Experian, and TransUnion—every 12 months. However, the reporting agencies are now offering free weekly credit reports online through April 2021. This impressive benefit makes it easy to check where you stand and get updates quickly. So, be sure to keep a close eye on your reports moving forward, especially if you have entered into any alternative payment arrangements.

If you would like further help understanding your credit report or making a plan for your debt during COVID-19, contact a credit counselor.

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#AskanExpert: How Do I Improve My Credit Utilization Ratio?

October 1, 2019CreditBy toptierfinancial

Q. My credit score is teetering on good/excellent, more towards good than excellent. I have 4 credit cards and that is all my debt. I have 0 balance on 3 of them. But Credit Karma says I’m using more than 30% of my credit. How is that determined, is that overall or on just the one card? Should I keep the other 3 and use them for small amounts and pay off monthly or totally close them? How do I move from good to excellent?

 

Dear Reader,

Your credit utilization ratio is the percentage expression of how much credit you use compared to how much credit you have available and is a very influential factor on your score. It’s calculated both per card and as a total taking into consideration all your revolving credit every month. Calculating your credit utilization ratio per card is rather easy. You simply divide the total balance on a credit card by the card’s credit limit, then multiply it by 100 to get the percentage ratio. For instance, if you have a card with a $1,000 credit limit and your balance is $400, your utilization ratio will be 400 divided by 1,000, multiplied by 100. That equals to a 40% utilization rate for that card on that specific month.

Your total utilization ratio is calculated the same way but using all of your credit card balances and all of your credit limits as a whole. So, if you had a total of three credit cards–two with a zero balance and a credit limit of $500 each–and the same credit card from the example above, you will have a total utilization ratio of 20%. Your total debt is still the $400 from that one card, but you have a larger total credit of $2,000 ($500+$500+$1,000). Although the total utilization ratio is optimal, the per card utilization ratio in this case is still high at 40%, which can negatively impact your score. From what you describe, it seems that you have a similar scenario in which your per card utilization ratio may be too high while your total is not. Calculate your utilization rate for the card with the balance and determine how much you should use per month to reach the recommended 30% utilization ratio.

If you are aiming to increase your score, you should not close any of your other accounts. Closing your credit cards increases your total utilization ratio because you will be reducing how much credit you have while your debt remains the same. A better alternative, as you suggest, is to use your three cards sparingly, keeping low balances and paying them off entirely each month. Playing with different balances will help you leverage per card utilization ratios and total ratio to reach the optimal balance.

Although your utilization ratio is significant, it is not the only factor that influences your score. Paying on time, the age of your credit history, what types of credit you have, and how often you apply for new credit also play a role. The varying degrees of how much these factors influence a score depends on the scoring model used. Currently, there are two main scoring models, the FICO Score, which is used by 90% of lenders in the industry, and the VantageScore, usually available for free through sites like Credit Karma. It’s essential that you note that there’s a distinction between the two and the scores they calculate. In fact, many consumers report having higher VantageScores than FICO Scores. Now, boosting your score with either model will take time, discipline, and a similar strategy. So, if you would like additional credit education and a personalized approach to help you transition to the “excellent” credit range you want, talk to an NFCC-certified credit counselor. A counselor can review your credit report in depth and help find areas of improvements to increase your score. You are on the right path. Good luck!

 

Sincerely, 

Bruce McClary, Vice President of Communications

Bruce McClary is the Vice President of Communications for the National Foundation for Credit Counseling® (NFCC®). Based in Washington, D.C., he provides marketing and media relations support for the NFCC and its member agencies serving all 50 states and Puerto Rico. Bruce is considered a subject matter expert and interfaces with the national media, serving as a primary representative for the organization. He has been a featured financial expert for the nation’s top news outlets, including USA Today, MSNBC, NBC News, The New York Times, the Wall Street Journal, CNN, MarketWatch, Fox Business, and hundreds of local media outlets from coast to coast.

 

 

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