Borrowing against your own money to build credit

Building credit is an essential aspect of financial responsibility for every Canadian consumer.

It not only provides financial opportunities, such as easier access to loans or better interest rates, but also helps establish a solid foundation for future financial endeavors.

In order to be proactive in building credit, it is crucial to understand the various financial products that assist in this process.

This blog will delve into some of these products, including credit builder loans, personal loans, borrowing against your own credit, and the innovative features offered by KOHO that can aid in credit building.

How Does a Credit-Builder Loan Work?

Credit-builder loans are specifically designed to assist individuals in building or rebuilding their credit history.

They work by allowing borrowers to make small monthly payments that are held in a savings account. Once the loan is fully repaid, the borrower receives the saved funds, and the positive repayment history is reported to credit bureaus, ultimately boosting the credit score.

Acquiring a credit builder loan involves applying through a financial institution or credit union. It is beneficial for individuals with no credit history or those trying to improve their credit score.

However, it is essential to manage these loans responsibly by making timely payments.

How a Personal Loan Can Help Your Credit Score

A personal loan is a versatile financial tool that can be used for various purposes, such as consolidating debt, funding education, or covering unexpected expenses.

Taking a personal loan can have a positive impact on your credit score if managed responsibly. When you make payments on time and in full, it demonstrates your ability to handle debt and improves your creditworthiness.

Additionally, having a positive repayment history with a personal loan can have long-term benefits, as it diversifies your credit profile and shows lenders your ability to handle different types of credit responsibly.

Should I Borrow Against My Own Money to Help My Credit?

Borrowing against one's own money, also known as a secured loan or a secured credit card, can be advantageous in certain situations.

For example, if you have little or no credit history, borrowing against your own money allows you to build credit while minimizing risk for the lender.

What is a secured loan?

A secured loan is a type of loan that is backed by collateral, which is an asset or property that the borrower pledges to the lender as a form of security for the loan.

This collateral acts as a guarantee for the lender that they can recover their funds if the borrower fails to repay the loan according to the terms and conditions.

Common examples of assets used as collateral for secured loans include:

• Real Estate: Home equity loans and mortgages are examples of secured loans where the borrower's home is used as collateral.

• Vehicles: Auto loans are secured by the car being purchased.

• Savings or Certificates of Deposit (CDs): Some lenders may offer secured loans with savings accounts or CDs as collateral

Secured loans are typically contrasted with unsecured loans, which do not require collateral. Instead, unsecured loans are approved based on the borrower's creditworthiness and ability to repay the loan, and they often come with higher interest rates due to the increased risk for the lender.

What is a secured credit card?

A secured credit card is a type of credit card that is backed by a cash deposit or collateral provided by the cardholder. It is designed for individuals who have limited or poor credit histories and may not qualify for traditional (unsecured) credit cards.

To open a secured credit card account, the cardholder first makes a cash deposit, which serves as collateral for the credit line. The amount of the deposit is often equal to the credit limit of the card.

For example, if you make a $500 deposit, your credit limit will typically be $500.

Secured credit cards can be used just like a regular credit card. But it's important to make on-time payments and keep the balance within the credit limit to build or rebuild credit.

How Does KOHO Help Build Credit?

KOHO is a financial platform that offers innovative features and smart ways to help Canadians build their credit.

KOHO offers a regular credit-building program and a flexible one. In the regular program, KOHO opens a line of credit for you, then you choose an amount to set aside.

Every month, KOHO reports that amount as an on-time payment to Equifax, building up your history as a responsible credit user.

The flexible credit-building program works similarly. Users first set aside their own funds as a secured line of credit within their KOHO account. That amount can be anywhere from $30 to 500.

Then, users can withdraw what they need from that amount, and KOHO will re-collect it at the end of the month. Those payments are also reported to Equifax.

By making regular purchases and payments through KOHO, users can establish a positive payment history, which is reflected on their credit report and improves their credit score.

KOHO also provides personalized financial insights, recommendations and credit-building tips to help users make informed decisions and build stronger financial habits.

Building credit is an essential aspect of financial well-being for every Canadian consumer. By understanding and utilizing the right financial products, such as credit-builder loans, individuals can establish a solid credit history and improve their credit score over time.

Additionally, innovative financial platforms like KOHO offer unique features that can assist in credit building. It is crucial for individuals to explore and choose the financial products that best suit their needs and enable them to build a strong credit profile.