Call Kurtis: Build Your Credit With a Little-Known Loan

If you're thinking about capitalizing on the housing market or you're trying to secure financial aid for a college student, you're going to need good credit to get decent interest rates.

We stumbled upon a little-known loan offered by some credit unions. The main purpose of it is to help you build or repair your credit.

"I just knew that I wasn't credit-worthy," said Malika Alim of Oakland.

She had a number of missed or late credit card payments on her credit report, so a couple of years ago, when Alim wanted to get a car, she knew getting a loan would be next to impossible.

"Credit is similar to a driver's license. You need to have it and you don't really appreciate it until you don't have it," said Alim.

She found the "Fresh Start" loan at her credit union, Community Trust. It's a credit-builder loan, which are often found at credit unions.

They work kind of like layaway; instead of getting the money up front, the credit union keeps the loan amount, say for example, $1,000, frozen in a savings account.

You make payments, with interest, until the $1,000 is paid off, then you get the money. Meanwhile, the payments are reported to the credit bureaus. If you paid on time, it will help your credit score go up. If you don't pay on time, the loan could hurt your credit. But you can usually stop the loan if you can't afford payments anymore.

But why would you want to pay interest up front on money you're not getting right away?

"A little bit of interest, I think that's a small price to pay to rebuild or start a new credit life," said Alim.

Credit Builder loans are pretty small, usually about $500 to $3,000. The payment period is usually six months to three years. The interest rates vary, but in Alim's case, she paid about $15 in interest on a $500 loan.

"There's been a lot more demand for the Fresh Start since the economy has gone south," said Sayla Eisner-Mix of Community Trust.

She says the loans aren't just for people wanting to repair bad credit. "Especially if somebody has decent credit, but they're looking to borrow money for anything; a house, a car, for a personal loan, for a business loan, it helps to bump up your score just a little bit," said Eisner-Mix.

The Fresh Start loan worked for Alim, who was able to repair her credit enough to get a car loan right after she completed the credit union loan.

"Having someone say yes to me in the credit world was empowering," said Alim.