Options When You're Building Credit

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Whether you're new to credit or you're working on rebuilding your FICO® Scores, it can be challenging to find affordable credit. Some, in fact, can be downright predatory.

But you don't necessarily have to strain your budget to get financing when you need it, and there are options that can be affordable and give you ample time to repay. Here are options that you should consider, along with some you should avoid.

Consider These Options to Build Credit

As you work on building or rebuilding your credit history, here are some potential options that can help you get the financing you need and also reach your goal of establishing a good FICO® Scores:

Unsecured personal loans: There are unsecured personal loans that are available to people across the credit spectrum, including for people who are new to credit or are rebuilding their credit history. These loans can still be expensive, with some charging interest rates of up to 36% or more. But they're much cheaper than payday and other predatory loans, and they'll typically give you several months or even years to pay back what you owe.
Secured personal loans: If you have cash in a savings account, you could use it as collateral on a savings-secured loan through a credit union. While you're making payments on the loan, you won't be able to access your collateral funds, but they'll be released to you once you've paid the debt in full. While APRs can vary for these loans, credit unions can't charge more than 18%, though there may be additional fees involved.
Credit builder loans: Credit builder loans function similarly to secured personal loans, but you don't need to provide the collateral upfront. Instead, when you open the loan, the funds are held for you in a separate savings account. You'll then make payments over a set period of time, and you'll get the loan money once you've made your last payment. This option might not work if you need money now, but if your only goal is to build credit, it's worth considering.
Unsecured credit cards: If you want something for everyday spending, you might consider an unsecured credit card. If you're new to credit, fintech companies like Petal offer unsecured cards with low fees and even rewards that don't require a credit score. But if you're rebuilding your FICO® Scores, you may be stuck with cards that charge annual fees and high APRs. Be sure to compare all of your options before you decide on this type of card.
Secured credit cards: Secured credit cards function the same as unsecured cards, the only difference being that you need to make a deposit upfront to secure the line of credit. This means you'll need to part with that money until you close the account or the card issuer converts your account to an unsecured card. But some of the best secured cards don't charge an annual fee, and some of them even offer rewards.

As you consider these loan products, take your time to think about your needs and which one would be the best fit to help you achieve your financial goals.

Also, keep in mind that you may be able to apply with a cosigner with some personal loans and credit cards if you can't get approved on your own. If your cosigner has good credit, not only could it improve your odds of approval but also help you score a lower interest rate.

Avoid Payday, Pawn, and Auto Title Loans

Among all of the loan options available to people with lower credit scores, payday, pawn, and auto title loans are arguably the easiest to get. In states where they're legal, they're generally easy to find, and many lenders that offer these loans don't even require a credit check.

But while you benefit from convenience and accessibility, you'll pay dearly for it.

Payday loans: On average, payday loans carry a 400% APR, and with a 14-day repayment period, you don't have a lot of time to come up with the cash to pay off the loan. As a result, a study by the Consumer Financial Protection Bureau found that more than 80% of payday loans are renewed or rolled over into a new payday loan.
Pawnshop loans: Pawnshop loans are much cheaper than payday loans, but they still charge a 200% APR, on average. They tend to be cheaper because they require collateral, which is typically a piece of personal property with enough value, such as jewelry, a musical instrument, or a firearm. You typically have 30 days to repay, which is more than double the amount of time you get with a payday loan, but it can still be difficult to meet that deadline, which means you could lose your collateral.
Auto title loans: Auto title loans are secured by your vehicle's equity, and you can typically get one only if you own the car outright and have the title. They're cheaper than payday loans but still charge an APR of about 300%. Repayment typically lasts 15 to 30 days, which isn't a lot of time to come up with the money, and if you fail to repay, you could lose your car.

It's also important to note that these loan options typically don't report to the credit bureaus, so you can't use them to establish a positive payment history.

If you're considering one of these loans, know that there are other options available that can help you build credit and don't pose such a large threat to your financial security.

Other Ways to Get Money

If you need money now and building credit isn't a top priority, there are other ways to get the help you need without borrowing from an institutional lender.

For example, you may consider borrowing from a family member or friend, though it's important to be careful with this strategy because it could damage the relationship if things go wrong.

You could also seek assistance from the government or a non-profit organization. For example, there are community organizations around the U.S. that can help you cover necessary expenses like rent, utilities, and food.

Whatever your needs are, take the time to research multiple solutions, so you can find the best one for you.

Ben Luthi

Ben Luthi has been writing about money and travel for seven years. He specializes in consumer credit and has written for several major publications and industry leaders, including U.S. News and World Report, Fox Business, Wirecutter, Experian, and Credit Karma.