Credit building doesn’t need to be an boring, time consuming or rigorous as it sounds. Knowledge is key! We have all been told to “shop around” when it comes to our finances. With so many products available for so many people it can be somewhat confusing. It is not the most fun job on the to do list! However, it is important to get the best deal out there for your circumstances.
To help, we’ve rounded up and summed up some of the key terms you’re likely to hear. Hopefully saving you the job of trying to decode finance jargon!
Credit building and Credit builder cards and loans
These are cards and loans specifically designed for people with a limited credit history. Built on the concept that by taking out one of these forms of credit and demonstrating you’re able to make repayments. This way you’ll be able to build up your credit score. However, like with any borrowing you do, it’s important that you use credit builder cards and loans sensibly.
Or Credit builder pre-paid cards
With pre-paid cards you load cash on them and use them to pay for goods/services. In return you will pay a monthly fee. Credit checks or proof of income aren’t required, so you can sign up easily. Once you’ve done this, you add a credit builder service to the card and then the lender will allow you to draw on a year’s worth of monthly fees. This is usually between £5 and £10 a month.
Credit building and Unsecured loan
This is a loan that’s given to you based only on your creditworthiness. You don’t need to put up any of your possessions for collateral.
If you’re not deemed to be creditworthy for an unsecured loan, you may want to use one of your assets (Usually your property.) This then acts as security for the lender that you will make repayments. A “Charge” is then attached to the property. However, be aware that by doing this, you run the risk of losing that asset if you fail to repay the loan on time.
Log book loan
This is another type of secured loan where you transfer ownership of a car, van or motorcycle (it must be worth more than £500 with no finance outstanding i.e you own the vehicle outright) to a logbook lender. This form of lending means you get to keep and use your vehicle. However, it’s important to note that if you can’t make repayments you could lose your vehicle. What’s more, interest is a lot more expensive than traditional forms of lending, so if you’re struggling with debt you might find yourself in a worse position.
If you’re struggling to get credit, you might be eligible for a guarantor loan. These are unsecured loans that require a guarantor to co-sign the credit agreement, essentially making that person liable if you default (don’t make the payments)on payments. As you might expect, not everyone is willing to enter into this sort of agreement, because if you borrow money and then can’t pay it back, the person who co-signed the agreement for you will have to pay that money on your behalf.
This is short for annual percentage rate and it basically reflects the annualised interest on any given loan, as well as the charges you have to pay, such as an arrangement fee. This makes it easier to compare different credit options.
If you don’t have enough of a credit history for a credit reference agency to generate a score and report, you will sometimes be referred to as thin file. This means you’ll need to start building your credit if you want to generate a report and ensure you’re an attractive prospect for lenders. Of course, building credit takes time but by using credit builder products effectively, managing your finances and getting on the electoral roll (if you aren’t already), you will be able to receive a report eventually.
Once you understand what all the different credit builder terminology and services are, you’ll be in a good position to start creating your credit history and growing your score.
Credit building, to conclude:
A good credit score is important for anyone to have. Loans are a necessary part of life for most of us. Building a solid credit history and maintaining a high credit score can have a dramatic impact on your life. This is true for both now and in the future. This can be when you’re considering applying for a loan or even opening a bank account.
By having a good credit score you will find it much easier and have more options available to you. Whether this be when its time to buy or upgrade you car, buying a home and getting lower interest rates. Today’s economy runs on credit. Your creditworthiness is defined by your credit score and is the key to your financial life.