One of the biggest conundrums is how to establish credit when no one will approve you for a credit card or loan. Before they lend you money, financial institutions typically want proof that you can handle credit responsibly. But what if you don’t have a credit score yet? One way to get your foot in the door and start building credit is to take out a savings secured loan. This type of loan, also referred to as a passbook loan, collateral loan, or pledge loan, essentially allows you to borrow money from yourself in order to demonstrate that you can pay it back. As you make on-time payments, you’ll build credit.
Let's take a closer look at what a savings secured loan is, and how it can help you establish credit:
What Is a Savings Secured Loan?
A savings secured loan is a loan that is backed, or “secured”, by the money you have in a savings account or CD account. When you take out this type of loan, you’ll receive the borrowed funds as a lump sum, and the bank will typically freeze a portion of your bank account, equal to the loan amount, so that you cannot withdraw it. Those frozen funds will start to free up as you make payments toward your loan balance. Just like a traditional personal loan, you can use the borrowed funds from a savings secured loan for a variety of purposes.
Using a Savings Secured Loan to Build or Repair Credit
Having a good credit score can help expand your borrowing power and allow you to secure lower interest rates. If you’re planning to buy a car or a house in the near future, you’ll want to ensure that you have a solid credit history. Handled well, a savings secured loan can help you build credit or improve poor credit.
Here are some key benefits of using a savings secured loan to build your credit:
- They’re easy to get. Because there is no credit check involved with a savings secured loan, it’s a great option for those with no credit score, or those who have made mistakes with their credit in the past. With the loan secured by your own savings, there is virtually no risk to the lender. They can just seize the funds from your bank account if you default on the loan.
- They appear on your credit report. When you make payments on a savings secured loan, those payments are reported to the three major credit bureaus. As long as your payments are on time every month, they will positively impact your credit score and help you establish a credit history.
- They have low interest rates. Since a savings secured loan is secured by your existing bank account, they usually have lower interest rates than a credit card or personal loan.
Secured Credit Cards
A secured credit card is another popular option for building credit. Like a savings secured loan, you essentially borrow money from yourself with this type of credit. With a secured credit card, you typically have to put down a deposit, and then you can make purchases using the card up to that amount. While secured credit cards typically have high interest rates, you can avoid paying interest altogether if you pay off your balance in full each billing period. For example, if you make $200 worth of purchases with your card during your billing cycle, you can avoid interest if you pay the full $200 rather than your minimum monthly payment when the bill comes due. Through our credit card partner Elan Financial Services, BankFive offers a basic secured credit card as well as a secured card with cash back options.
Enhance Your Future Borrowing Power
A savings secured loan or secured credit card can be a smart way to build or repair your credit so you can borrow the funds you need later on in life. Explore BankFive’s secured loan and credit card options today, or contact us for more information. Plus, with a BankFive deposit account or loan, you’ll gain access to free credit score monitoring through Online Banking. See your score or pull your credit report whenever you’d like and use our Credit Score Simulator to see how different financial scenarios could impact your credit.