Overview: Installment Loans & Credit Building
In order to establish or maintain good credit, you need to have agreed to make payments to an organization who reports to either one, two, or all three credit bureaus AND you have to make those payments on time. Let's break that down a bit:
The importance of being on-time:
Multiple on-time payments reported to a credit bureau can contribute to building healthy credit. In contrast, just one late payment can be harmful to your credit. In fact, one late repayment to the credit bureaus can drop a score by 40 points or will make it so that you gain a visible score, but it is a low score due to your missed payment.
Patience is required:
Installment loans are paid off over a period of time. Examples of installment loans include auto loans and student loans. Any installment loan can build or destroy credit. Some providers specifically offer something called a credit-builder loan to help someone establish credit; this is usually an installment loan. Using an installment loan, it will take multiple on-time payments to build or establish credit. You should plan on paying off a loan or a debt over time. Some people try to pre-pay a loan (pay it off as quickly as possible). The reason why they are doing that is because the longer you take to pay it off in full, the more interest a bank or lender will charge you. Interest charges and fees are the ways most student loan providers, banks and lenders make a profit. It is very rare to find a loan that will help you build credit that doesn't have interest or fees attached to it. finEQUITY.org does not charge interest or fees - instead we seek out charitable donations from the public so that you don't have to pay fees or interests. As a result, our loan is not meant to be paid off as quickly as possible. We instead ask participants to let 7-9 months pass to see the impact of our installment loan on their credit reputation.
Overview: Credit Invisibility
Some people who are coming home after incarceration may be credit invisible. This means you have no credit report and/or no credit score. Banks and lenders may consider you as not creditworthy or more of a risk because you haven't established a reputation of re-payments that they can view on your credit report.
Overview: Credit Cards & Credit Building
Credit cards build credit fast but they are the hardest to use properly:
Credit cards are not installment loans. Credit cards are considered to be a revolving loan in that the money lent to you revolves (cycles) each month (it cycles every 25 days). Many of us have actually used credit cards improperly. Using credit cards builds credit fast (usually the fastest); but only if done following two rules: 1) pay your balance used before the 25 days/due date and 2) use less than 30% of the money you could spend (i.e. don't spend all of it or even half of it). Credit cards make money off of you by allowing you to forget to pay on-time. Each late payment will result in interest charges. Even a partial payment may count as on-time but will still incur interest charges. And credit card companies report the percentage (%) of how much you spent that month to the credit bureaus - overspending will NOT result in a credit boost (it will either result in a drop in your credit score or have no impact at all).