Credit scores can be complex and confusing. But the bottom line is fairly clear. If your credit score is too low, you can struggle to get approved for credit cards, car loans or mortgages. One solution for improving less-than-desirable credit rating is a credit builder loan. Credit Strong, a new division of Austin Capital Bank, offers a new kind of account to help establish or rebuild your credit history.

What is a Credit Strong Account?

Credit builder loans from CreditStrong are unique because they are an online fusion of a secured installment loan and a FDIC insured savings account.  Each month, your loan payments get reported to all three major credit bureaus, helping to build positive credit history on your profile. A portion of you payments gets credited towards your savings, so at the end of you loan period you end up accumulating $500-$2,000 in savings as well as building your credit. There is no hard pull on your credit, and no credit score required, meaning you can have no score or thin history and still be approved.

People with poor credit can get these loans and use them as a tool to increase their credit rating in the future. Since around 35% of your credit score is based on payment history,  making payments towards a Credit Strong account in a timely manner can make a big difference.

How Does Credit Strong Work?

• Activate an account. You begin by activating a CreditStrong account. There’s a small fee for doing so, but your credit report isn’t pulled and doesn’t factor into whether you’re approved for an account. One major perk is there is no upfront security deposit to open the account and start building credit.
• Choose a loan.CreditStrong offers several types of loans to meet varied personal finance needs. You can select loans with payment terms of 12 or 24 months. Loan amounts range from $500 to $2,000. The loan total is put in a locked savings account on your behalf. There is no penalty or fee for early termination, meaning you can cancel at anytime and recoup any savings you’ve earned.
• Make timely payments.You make small monthly payments on your loan. Payments range from $24 to $150, depending on the amount borrowed and payment terms. During the loan repayment, the savings account remains locked. The savings account acts as security for the loan, which means it pays off the loan if you fail to do so.
• Enjoy positive reporting on your credit accounts.As you pay off the loan, the bank reports payments to all three credit bureaus. Making timely payments for the life of the loan results in one to two years of positive reporting on that account, which can build your credit score. You can also track your progress each month with your FICO 8 ® Score for free. FICO is the score that 90% of top lenders use when making credit decisions.
• Access the savings account funds. Once the loan is fully paid off, the savings account is unlocked. You gain access to the original funds plus any interest that accrued in the account during the loan period.

Pros and Cons of Credit Builder Loans From CreditStrong

The benefits of a CreditStrong loan include no hard pull on your credit report, which can decrease your credit score. Because the loan is secured by the locked savings account, you don’t have to make a security deposit or put up collateral. And if you pay the loan off properly, you reap the rewards of positive reporting on your credit profiles.

Unlike secured credit card, you also set aside savings each month. For some, this tends to be a more reliable way to build credit because you are not at risk of overspending in order to add positive history to your profile.

The only disadvantage of a credit builder loan is that if your payment is 30 days past due, it’ll be reported as late. That’s why it’s crucial to make all of your payments on time.

Who Might Benefit From This Type of Loan?

For many people, focusing on rebuilding your credit profile to be in good standing makes sense. After all, if you pay around $100 and your score ends up moving from bad to fair or from fair to good, you can take advantage of better credit card and loan offers in the future. That’s likely to save you much more than $100 in future interest.

But credit builder loans only work if you’re willing to put in the effort. First, you have to make timely monthly payments on the loan. Otherwise, you run the risk of negative reporting to the credit bureaus. That drives down your score rather than bringing it up.

Second, you have to make good financial decisions on the rest of your accounts. That means keeping credit utilization down, making timely payments on all your accounts and keeping an eye on your credit report to see if any errors are impacting your score.

No single tool will fix bad credit, but smart use of all your financial resources can. If a credit builder loan sounds like the right tool for you, you can apply for an account today.