What is a lending circle?
Rather than going to a bank to take out a loan, some have found another method that doesn't come with paying interest and other fees. This method is called a lending circle (otherwise known as rotating savings and credit associations).
Lending circles allow a group of trusted people to contribute a fixed amount towards a shared pool. Then, each member of that group at different points of time gets the funds by rotating through.
In this article, you will learn:
- How lending circles work
- If lending circles affect your credit score
- How lending circles help build credit
- Other ways to build credit
How do lending circles work?
Lending circles can be done through a group of trusted friends, loved ones or family members. The pool of money is there for someone to use when they may need cash quickly and don't want to pay interest or other fees that you may incur with a personal loan or credit cards.
Essentially, each member of your group contributes a certain amount each month — after a set amount of months, one person collects the entire pool. The cycle of replenishing the pool continues, and the recipient of the total rotates through the group.
For example, if you and a group of nine other people you trust decide to contribute $1,000 each month towards the pool, a total of $10,000 will be available to one person each month. That person may be in need of a new sofa, a down payment towards a car or to help pay off medical expenses. So, that total goes to one of the 10 people.
This cycle continues, and the recipient of the total funds rotates after each person has contributed each month. After 10 months, each person would have received a payout of $10,000, which acts as an interest-free loan. Each person during this cycle at some point becomes a lender or a borrower.
Starting a lending circle
Some people may use online payment platforms to help organize the funds. Others may go through certain nonprofit organizations that offer lending circles. If you don't have a group of people you know could contribute towards a lending circle, certain organizations may help you form a pre-approved, trusted group that's a part of a lending circle. These institutions may check each members' payment history so you can be aware of your level of risk as you go into the agreement. Be sure to check with the organization's terms in the event there may be certain costs or fees.
Do lending circles affect your credit score?
Institutions and nonprofit organizations that offer lending circles may report your activity to the credit bureaus. If this is the case, then depending on your activity, a lending circle can affect your credit score either positively or negatively.
On the other hand, if you're contributing towards a pool with your friends and family, then your activity will not be reported and your credit score will not be directly affected. However, you'll want to make sure that if you are contributing to a lending circle, you can still pay off your other bills as that could affect your payment history. For example, if you contribute $500 towards a lending circle, but can't pay off your credit card, then you could hurt your score.
If you're curious how lending circles could be affecting your current score, you can track your credit score by enrolling in Chase Credit Journey®. This free online tool gives you updates to your credit score as other resources on how you can improve it. You don't even need to be a Chase customer to use it.
How do lending circles help build credit?
If you use a lending circle through an institution that reports your activity, then opening this account could help diversify your credit mix, which is a factor that goes into building your credit score.
Additionally, consistent, timely payments made to your lending circle can help improve your payment history, which makes up a large portion of your credit score.
Lending circles can be a good option for building credit because they generally come with no fees or interest. However, they are not the only way to build credit — other options may be more helpful as you start your financial journey.
Other ways to build credit
Lending circles may come with no interest or fees, but taking out a new credit card or loan can also help build strong credit, and even give you access to higher credit limits than what your lending circle can offer.
Still, there are other ways to build credit without having to take out a loan. These include, but are not limited to:
- Making on-time payments towards your credit card balances
- Lowering your credit utilization ratio
- Adding a new line of credit, auto loan or mortgage to diversify your portfolio
Monitoring your credit is another great way to help improve it over time. Staying aware of your financial choices and how they affect your score can help you make adjustments as needed. You can also look out for any inaccuracies or potential signs of fraud, which could harm your score.
Build your credit score with Credit Journey®
If you want to build your credit but you're not exactly sure where to begin, start by enrolling in Chase Credit Journey. With this free online tool, you can receive a personalized action plan provided by Experian™, which details steps you can take towards raising your credit score over time.