Secured loans can be a great option if you’re looking to build or improve your credit score. A secured loan is a type of loan that requires collateral, such as a car or savings account. You can establish a positive payment history and improve your credit score by making timely payments on a secured loan. But how do secured loans help you build excellent credit scores?
What is a Secure Loan?
Secured loans are loans that require collateral to secure the loan. The collateral can be any valued asset, such as a car, savings account, or home. If you fail to make payments on the loan, the lender has the right to seize the collateral to recoup their losses. Secured loans are typically easier to obtain than unsecured loans, as lenders have less risk due to the collateral.
1. Low-Limit Credit Card
A low-limit credit card can be a good option for building your credit. It typically has a credit limit of a few hundred dollars, which can help you manage your spending and ensure you don’t overspend. As a result, there is no way to go bankrupt in using it, leading to bad credit scores.
People can establish a positive payment history and improve their credit score by making timely payments on the card. Since it is a low-limit credit card, people can often make total payments without worrying that they will run out of money instantly.
2. Secured Credit Card
A secured credit card is another option for building credit. A secured credit card requires a deposit, which serves as collateral for the card. The deposit typically equals your credit limit, so if you deposit $500, your credit limit will be $500.
People can establish a positive payment history and improve their credit scores. However, since the card has a deposit, people can withdraw it if they close the account and apply for a more traditional credit card.
3. Become an Authorized User
If you have a family member or friend with a good credit score, you can become an authorized credit card user. As an authorized user, you can use the card to make purchases but are not responsible for the payments. However, the payment history on the card will be reported to the credit bureaus, which can help improve your credit score.
4. Obtain a Student Loan
Student loans are another option for building credit. They are typically low-interest loans used to pay for education expenses. By making timely payments on your student loans, you can establish a positive payment history and improve your credit score.
5. Add the Rent to the Report
If you’re a renter, you can ask your landlord to report your rent payments to the credit bureaus. Rent payments are not typically written to the credit bureaus. Still, by adding your rent payments to your credit report, you can establish a positive payment history and improve your credit score.
Conclusion
Secured loans can be a great option for building excellent credit scores. You can establish a positive payment history and improve your credit score by making timely payments on a secured loan. However, there are other options for building credit, such as low-limit credit cards, secured credit cards, becoming an authorized user, obtaining a student loan, and adding rent payments to your credit report. You can establish a strong credit history and achieve your financial goals using these strategies.
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