This article was last updated on April 2
Credit Unions are a great way to get a loan and improve your credit score. Many people overlook this small gem, and continue to be declined for credit opportunities when using traditional banks and financial institutions. Do not allow your poor credit rating hinder you from improving your financial health. Credit Unions are small businesses, they are not a huge conglomerate, and will look beyond the “black and white” of the loan process.
You can get a low cost secured loan, free credit counseling, and online debt management courses from your Credit Union. They are also non-profit, member owned entities so they are able to maintain low enough interest rates, as they only need enough money to cover operating expenses. In comparison, their interest rates are much lower than those offered by your typical bank.
Improving a poor credit score is not a magical equation that will happen immediately. It will take approximately six months to go from a poor credit risk to a good credit risk status. If you are serious about improving your financial standing, and make your loan payments on time, you will see a steady incline on your credit score.
If you haven’t done so already, a good place to check your credit score are sites like Credit Karma, Free Credit Score and even via your existing credit card company. Your credit score is updated every seven days, and it doesn’t damage your credit score to check your rating. With each incline to your credit rating, you will see a steady decline to your interest rate on future loan needs.
What Kind of Loans are Offered?
A credit builder loan is something that many Credit Unions offer. This is usually small loan ranging from $500 to $3000. You can also get free credit counseling at the Credit Union. There are three sessions offered and the focus is on cash flow analysis. Most people are not able to fully understand the scope of their financial crisis and because they feel overwhelmed, they simply give up, thinking a better credit rating is just another lost cause. Many of these institutions also have online tools that will help you get a better understanding of your financial standing.
Secured credit cards are also a perfect solution for those with poor credit scores. You need to deposit a minimum amount into a savings account, usually $500. This savings account is used as collateral against the use of the credit card. Making your regular monthly payment will begin the upward motion of your credit score.
When Credit Unions first came into existence, many people found it very difficult to withdraw money from their accounts, because the locations were so sparse. That is no longer an issue because these small business institutions have created excellent ATM partnerships. As long as you follow the guidelines the Credit Unions set forth regarding ATM usage, you won’t see any additional charges to your account for ATM usage.
A real life example
The following is a true story of how a woman named Susan improved her credit score by working with a Credit Union. Susan had a poor credit rating of 580, but she needed a car. She went to a local used car dealer and the only bank that would even consider giving her a loan was the local Credit Union. Her score was the absolute lowest the Credit Union would accept to provide financing. Her car loan was $12,999 and she put a $700 down payment on the car.
The maximum the Credit Union would provide for a used car loan was $11,325, so they also offered Susan a personal loan of $1,991.60 to cover the balance needed for the car. Because of her poor credit rating, Susan was faced with a 7.48% interest rate for the car loan and a substantial 14.99% interest rate for the personal loan! Her combined monthly payment for the car is $239.07, and the duration of the loan is five years.
Susan was determined to show the Credit Union that they made a wise decision by taking her on as a credit risk. Within the first two months, she was able to pay an additional $700 towards her personal loan. Granted, this is not something that everyone will have the luxury of doing, but it really worked in Susan’s favor. As a side note, it is always wise to make extra payments on high interest rate loans whenever you are financially able to.
Three months later, Susan returned to the Credit Union because she needed to pay her property taxes accrued from last year on two properties and this year’s school taxes for each property. The two properties together have an outstanding balance of $7500. The Credit Union granted her this additional personal loan at an 8.74% interest rate! Wow, in just three months, her credit score went from a 580 to a 670 and her interest rate for the same type of loan decreased by 6.25%! Her payment for this loan will be $158.64 for five years.
Susan had a financial crisis 45 days later and had to return to the Credit Union again to secure more funds for a personal emergency. This time she was sure she would be declined for her loan. What relief came over her when the representative stated she could provide the $9400 needed for her emergency! By this time, Susan’s credit score had risen again (because she kept making her payments on time, never late) to a whopping 690, which was amazing! Her interest rate held steady at 8.74% and her payment will be $281.92 for five years.
Susan’s borrowing at this point does need to end until some further payments are made, because this 4.5 month whirlwind has added $30,216.60 to Susan’s financial portfolio and some luxuries in her budget will need to be eliminated. While the additional financing has created some strain to Susan’s buffer zone within her budget, her credit score in that short 4.5 month period dramatically increased by 110 points!
Additionally, Susan’s husband is co-signer on each of the four loans listed above. Another point to consider is that all loans from Susan’s Credit Union are also required to have a life insurance premium added to each monthly payment. As a result, if either Susan or her husband pass away before the five year term is met, the loans will be considered paid in full. Neither of them will face financial burden if either pass away before the loans are paid in full.
Indeed, you need to be a member of a credit union to take advantage of their loan programs. However, the requirements to become a member are not as stringent as they once were. Check your local yellow page listings for Credit Unions and call them to see how you can become a member today!