Now that your teen has graduated, it’s a great time for them to start building their credit by using a credit-builder loan.

How does a credit-builder loan work?

The amount you borrow is held in a bank account while you make payments. You typically can’t access the money until you have fully repaid the loan, which means you are able to build savings and your credit at the same time. This also acts as a safety net for the lender that’s taking on risk if you have no experience with credit or a bad credit score.

Your loan payments are reported to at least one credit bureau. Your credit score is built from information in your credit reports, which the three major credit bureaus compile. Having your payments reported helps build your credit as long as you pay on time.

Keeping up with payments on your credit-builder loan is crucial because it shows you are able to handle a credit account. Credit scoring models FICO and VantageScore pay the most attention to your payment history in your credit reports.

How to manage a credit-builder loan

Pick the right type of credit-builder loan. Look for one with a payment you can comfortably afford. Stretching your budget will only raise your risk of missing a payment and damaging your score.
Make payments on time. If you pay the loan as agreed, you build up good data on your credit reports. But a payment more than 30 days late will also go on your reports and can seriously hurt your score.

Decide what to do with your loan proceeds, plus any interest. At the end of the loan term, you get the money — and likely a better credit score. If possible, use that money as an emergency fund. Having even a few hundred dollars saved can insulate you from unexpected expenses that otherwise might lead to debt or missed payments and score damage.

Ascent CU offers credit-builder loans, also known as share-secured loans. If you have any questions about these types of loans, call our loan experts at 801-399-9728 and they can advise you on the best product. You can also learn more about these loans and apply for one by clicking here.

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