What You Need to Know and Alternatives

It’s no secret that establishing credit can be a treacherous experience for many people. In particular, if you’ve never had a parent with good enough credit to add you as an authorized user, you may go through your entire young adulthood without any credit at all. When you finally decide to take out a loan, you may be shocked to find denial from every corner. In an emergency, you may have to resort to a local pawnshop, title lender or payday loan outlet.

If you’ve struggled to borrow money in the past, is tech company, LendUp, a good way to start building credit today? Here’s what you need to know about the company and your options for building credit when you lack a lot of other resources.

If you’ve failed to establish credit in the past, it could be because you have negative information on your credit report. Negative information includes unpaid utility bills, judgments against you (including demands to pay child support), or even unpaid phone bills.

You can look up your credit report for free from AnnualCreditReport.com. You can also check out your full credit profile using sites like Credit Karma or Credit Sesame.

If you find any information that doesn’t seem correct, you can dispute the errors with the credit reporting agencies.

Once you know what’s on your credit report, you might become obsessed with “fixing it.” You’ll suddenly start to notice the signs that say, “Fix bad credit. $295.”

While you can dispute errors on your credit report, getting rid of valid information your credit report isn’t so easy (and it’s illegal). Negative credit information will stay on your credit report for seven years. Instead of wasting your money (and worse, your time) on trying to get rid of negative information on your credit report, make a plan to establish good credit.

Once you start establishing good credit history (such as on-time loan payments), all the negative information on your credit report starts to be overwhelmed. Sure, lenders don’t want to see that you didn’t pay your water bill two years ago, but they care a lot more to see that you did pay your credit card last month.

Knowing the importance of good credit history, you probably want to get busy taking out credit, especially if you need cash now. Unfortunately, that isn’t always a good choice. Establishing credit in an emergency typically doesn’t make sense. It’s better to focus on overcoming the emergency (and even letting bills go unpaid) than to take out usurious loans that will trap you into paycheck-draining payments for months.

Once the emergency cash crunch has subsided, and you have some mental bandwidth, make a commitment to establish good credit using proven methods.

If you’re a U.S. citizen or a U.S. permanent resident, starting to establish credit is not too difficult. The place to start is a secured credit card. Since most secured credit cards require a deposit (such as a deposit of $50 to $500), the lender takes on very little risk if you default. Additionally, the credit card issuer may require proof of income (such as a W-2 job or evidence of a disability payment). As long as you can prove your income and can secure a deposit, you can start building credit.

Most secured credit card issuers will issue credit to you, even if you have evidence of unpaid bills (such as cell phone bills or unpaid utilities) on your credit report.

Once you have a secured credit card, you can start building credit by making on-time payments. That’s really all there is to it. Charge a little something on your secured card every month (perhaps a single tank of gas, or a small grocery run), make the payment in full, and move on with your life. Within 6 to 12 months, you will have an established credit report, and in all likelihood, an okay credit score.

LendUp bills itself as a payday alternative that helps people in trouble build credit. Do they really offer help? This is what we found.

LendUp has at least some products available in the following states: Alabama, California, Florida, Hawaii, Idaho, Illinois, Indiana, Kansas, Louisiana, Maine, Minnesota, Mississippi, Missouri, New Mexico, Ohio, Oklahoma, Oregon, South Carolina, Tennessee, Texas, Utah, Washington, Wisconsin, and Wyoming.

Right now LendUp offers two secured credit cards (both in beta-testing right now). The L Card Visa^® credit card has interest rates ranging from 21.74% to 31.74% and annual fees ranging from $0 to $60. The annual fee is immediately deducted from your credit limit. Late payments on the card cost $7.

The Arrow Card Visa^® credit card account has interest rates ranging from 21.24% to 31.24% with annual fees ranging from $0 to $75. Late payment fees cost up to $25.

In general, we recommend that borrowers choose secured credit cards with no annual fee, so these two cards are not ideal for the secured credit card customer.

LendUp offers a short-term (7- to 30-day) loan product. Instead of charging interest, LendUp charges a loan fee. For example, a loan fee on a $250 loan is $44. Unlike most payday lenders, LendUp actually calculates an APR on their loans. APRs on the loan range from 214.13% APR to 917.71% APR.

When you borrow money from LendUp, you’ll repay the entire loan and the fee in your next paycheck. These “payday” loans aren’t reported to the credit bureaus if you pay on time.

LendUp also offers short-term installment loans with terms ranging from 2 to 12 months. These are small loans ranging from $100 to $1,000. You’ll pay a 5% origination fee (called an administrative fee), and the following interest rates:

• 2.5% per month on that part of the unpaid principal balance up to and including $225.
• 2% per month on that portion of the unpaid principal balance above (in excess of) $225 up to $900.
• 1.5% per month on that part of the unpaid principal balance in excess of $900 up to and including $1,000.

In total, these loans have effective APRs of 31.78% to 68.02%. In good news, on-time payments may be reported to the credit bureaus.

The good news about LendUp’s credit products (especially their payday loans) is that they are available in a pinch. The rates are astronomical, but the rates are fixed rather than compounding. If you’re facing a one-time emergency (rather than a chronic income shortage), LendUp is an okay option. If you have a credit card, use that instead, but LendUp’s fees are likely lower than paying a couple of late fees.

LendUp’s other products are not ideal in a pinch. If you can qualify for one of LendUp’s installment loans, you’re probably well on your way to establishing credit, and should start looking for a credit card with no annual fee.

LendUp has a four-step ladder that helps new credit consumers build credit. You earn points by taking out loans, but also by taking credit education courses and adding a LendUp testimonial.

If none of these are enough, a payday loan from LendUp could be an option of last resort. But be careful with payday loans from any company, including LendUp. The fees on the loan may be so high that it’s better to deal with late fees from utility companies or your landlord than to take out a payday loan.