How to find credit-builder loan programs

Wednesday, May 30, 2012

Because a strong credit history is so important to financial prosperity, some non-profit organizations offer special loan programs that enable people with credit problems or who are new to the U.S. credit system to borrow and build a credit history even if they wouldn’t qualify for a loan anywhere else. What makes these loans different is, among other things, the emphasis on building credit over simply borrowing money. Consumer Action has compiled a directory (PDF only) to help consumers find these programs in their own state. (We will be updating the directory regularly. If you know of a program that is not already listed, please let us know about it by sending an email to .(JavaScript must be enabled to view this email address).)

There are variations on credit-builder loan programs but they generally fall into two categories: those in which the money for the loans comes from the non-profit organization or an affiliated supporter (identified in the directory as Microcredit) and those in which the loan funds come from the groups (circles) of participants themselves (identified in the directory as Lending circle).

All loans in the directory report to one or more of the three major credit bureaus—necessary for building a credit file that will be used by mainstream creditors, landlords, utility companies, insurers and others—and, unless otherwise noted, none require collateral or a minimum credit score. Some loan programs require that the loans be used for specific purposes, such as establishing or expanding a business, and many require that borrowers fulfill requirements such as attending money management classes or contributing to a savings account.

Click here to read more about credit-builder loans and other alternative funding sources, including peer-to-peer lending.

If you don’t see a program in your area, follow our tips to find out if one exists.

• Contact a local community service organization that provides financial services to low-income individuals—many loan programs will promote their services here first. Ask community banks and local credit unions (see below) if they have credit-builder programs.
• Contact a program like Mission Asset Fund (MAF), a pioneering non-profit in San Francisco that is helping establish lending circles in other parts of the U.S., to find out if there is an affiliated program being offered in your area. Even if there isn’t, letting MAF know there is demand for the services in a particular area can help to get a new lending circle program started.
• If you’re a member of a credit union, ask about credit-builder loans or similar products and services that could help you establish or build credit. According to CUNA, the Credit Union National Association, nearly 15% of credit unions offer credit-builder programs. One such program places the money you borrow in a savings account you open. As you make regular payments on the loan, the credit union reports your account activity to the credit bureau and you build a positive credit history. After you have repaid the loan in full, the money in the savings account is yours to use as you please. If you don’t already belong to a credit union, find one at ASmarterChoice.org or call 800-358-5710. Some banks also offer credit-builder loans.
• Search online for sites and stories that highlight lending circles and other credit-builder programs. Organizations that offer such programs have been the subject of many articles.
• Keep your eyes and ears open for news of credit-builder programs in local newspapers and on in-language radio and television. But before responding to any loan program announcement, investigate it. Contact a local credit union, the Better Business Bureau, a local consumer protection agency or other trusted organization to inquire about the program. Legitimate credit-builder programs will be known to respected community service organizations—and they won’t charge high fees.

The directory is available only as a PDF download. Click here to download the PDF.