You need decent credit to take out a loan, but you can’t build good credit if you don’t have a credit card, a loan or other type of credit history in the first place. It feels like an impossible situation, but you’re not alone—nearly everyone with a thin credit history has the same issue. If you’re ready to build your credit, you could take out a credit builder loan. But what is a credit builder loan, and how can it help you improve your credit score?
Luckily for you, we’re here to answer your questions. We’ll guide you through the advantages of credit builder loans and tell you where to find financial products you can use to create a well-rounded credit report. By the time we’re done, you’ll know how to achieve a credit score you can be proud of.
What is a Credit Builder Loan?
In short, a credit builder loan can help you jump on board the credit train. Credit builder loans are for low amounts—usually under $1,000—and they have short repayment periods. Most credit builder loan repayment terms range between 6 and 24 months.
How Do Credit Builder Loans Work?
Credit builder loans work differently than regular loans. When you take out a regular personal loan, the lender deposits a set amount of money into your bank account, which you can use for a preapproved process—to buy a car or to consolidate credit cards, for example.
When you opt for a credit builder loan, the money you borrow goes into a secured savings account or a certificate of deposit (CD), where it sits until you pay off the loan. You gain access to your money after you make your final loan payment. Also, your lender will probably report to at least one of the three credit bureaus.
How Are Credit Builder Loans Managed?
We’ve already mentioned that unlike regular loan funds, credit builder loan funds are only released after you make your final loan payment. Generally speaking, lenders wire transfer funds into checking or savings accounts. Some lenders also return a portion of the interest you’ve paid—minus fees—but that isn’t a universal policy, so check the small print before you sign up for your loan.
If you want to, you can repay the loan early. Think twice before doing this, though, because it’ll cut short your positive payment history. If you do repay your loan early to avoid interest fees, you may still have to wait to withdraw your money if it’s being held in a CD.
Fees associated with credit builder loans include:
- Administrative fees, which are usually paid before you get approved for the loan.
- Annual percentage rate (APR), which is an interest rate on the loan.
- Late fees, which apply if you make a late payment or if you miss a payment.
To achieve the best possible payment history, make sure you pay on time every month—and complete your entire loan term.
Is a Credit Builder Loan Worth It?
Many people find credit builder loans very useful. If you’re willing and able to set aside a monthly payment and you can wait for your loan funds, assuming on-time payments and no other negative factors, you might enjoy a credit score boost at the end of your loan term. Plus, you could qualify for lower interest rates—and as your score improves, you’ll be that much closer to get approved for an auto loan or a mortgage.
What Is a Credit Builder Card?
Credit builder cards work in a similar way to credit builder loans. They’re designed to help new consumers build credit, and they’re also aimed at people looking to improve their credit scores. Credit builder cards usually have low credit limits and higher APRs, because people with thin or poor credit scores are considered higher risk than those with established good credit. You can avoid paying interest by paying off your credit builder card in full every month.
Need to resuscitate your credit? Visit Credit.com to find personalized credit builder card options you can use to lift your credit score.
Other Ways to Build Your Credit Score
Credit mix accounts for 10% of a consumer’s FICO score. A good credit mix includes revolving credit accounts, like credit cards and store cards, and installment credit accounts, like car loans and personal loans. You can begin assembling your credit lineup by:
- Becoming an authorized user on someone else’s credit account
- Getting an auto loan with a cosigner
- Acquiring a store card or a secured credit card
To improve your credit score, make payments early in each billing cycle, keep your credit usage low and don’t be tempted to apply for too many financial products at once. Over time, your credit score will improve and you’ll be able to upgrade to great-value credit cards and low-interest loans.
Find the Right Credit Builder Loan for You
Getting a credit builder loan could be a great financial move for you. Most credit builder loans are for small amounts and have a short repayment schedule, so they’re easy to manage. But take a good look at your goals and finances before making any decisions, just to make sure that it’s the right step for you.
Looking for the right credit builder loan for your financial situation? Find a selection of loans and other financial products at Credit.com.
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July 26, 2021