- Whether you are trying to build a credit history or looking to improve an existing one, credit-builder loans are an option you might want to consider.
Credit builder loan is one of the numerous ways to build or improve your credit score/history. Credit-builder loans remain a great option due to their safe nature and the fact that they allow borrowers to save money while they are working on their credit history.
Most lenders of credit-builder loans report to the three credit bureaus – Experian, Equifax or TransUnion – which means if you can make timely monthly payments on your loan, your credit score/history will improve significantly.
To be able to take full advantage of this great loan option, you must familiarize yourself with Credit Builder Loan and All You Need to Know in 2023.
Table of Contents
What is a Credit Builder Loan?
A credit-builder loan is a financial strategy used to build credit and savings simultaneously. They are also referred to as “Fresh Start Loans” or “Starting Over Loans”.
How it works is that a lender sets aside a particular amount of its own money in a savings account in your name, which you then begin making monthly payments towards, then get the balance at the end of the loan term.
A credit builder loan lets you make fixed payments into a savings account over some months and at the end of the loan term, the lender will give back to you the amount that you have in the account. This may or may not include some of the interest you paid. The interest rate usually ranges from 6% to 16%.
Compared to traditional loans, these loans are easier to get, as the lender is not exposed to many risks.
Credit builder loan are usually offered by community banks, credit unions, online lenders and financial technology companies.
More on Credit-Builder Loans
These loans work differently than traditional loans, in the sense that, instead of giving the borrower a lump sum of cash at the beginning of the loan term, the money is held in a savings account until the loan is fully repaid.
The borrower then makes fixed monthly payments against the amount in the savings account and also interest to build a strong payment history.
The essence of this loan is that, if the borrower has poor credit or no credit history, it will help them build a record of trustworthy financial conduct.
All through the length of the loan term, which often extends between six and twenty-four months, the lender reports the borrower’s payment history to the credit bureaus, which can help build positive credit of they have been making timely payments.
A credit builder loan generally range from $300 to $1,000. Loans with larger credit limits will help improve credit scores quicker as it shows a borrower’s ability to manage more debt.
How to Get a Credit-builder Loan
After concluding that a credit builder loan is the right option for you, follow the steps below to get things started.
1. Look for lenders that grant credit-builder loans: To begin, the first step is to look for lenders who offer this type of loan, as not all lenders do. You can contact local banks, credit unions, or even online lenders. If possible, pick a lender that reports payments to all three major credit bureaus. The benefit of this is that it will ensure you get the optimal benefit from making timely payments on your credit-builder loan.
2. Compare lenders: While searching for potential lenders, ensure to contact more than one lender so you can compare offers and pick the one with the best terms. For each lender you consider, check to see if they offer prequalification.
3. Settle on the amount you would like to borrow: Unlike in the case of traditional loans where the amount you borrow is usually dependent on the amount needed, the amount that you borrow in the case of a credit-builder loan is dependent on the amount you can afford to commit to your loan account, and how much you want to better your credit score. Ensure to think it through before deciding on an amount.
4. Apply: Once you’ve chosen a lender, find out all you can about its loan application process, and apply.
5. Begin repayment: After your loan application has been approved, ensure to know when you’re expected to make your first payment and how to go about it. To use a credit-builder loan to better your credit score, you must make your payments on time.
Getting a Credit-Builder Loan
When you apply for a credit-builder loan, instead of basing your eligibility on the status of your credit score, some lenders may consider your banking history through the consumer reporting agency ChexSystems.
To acquire a credit-builder loan, you will need to provide some or all of the following:
- Employment information.
- Pay stubs as proof of income.
- Pretax monthly income.
- Total housing payment.
- Checking and savings account balances.
- Other loan balances.
How to Manage a Credit-Builder Loan
While considering a credit-builder loan, keep these tips in mind.
1. Only take what you can afford to repay: Since the size of your monthly payments largely depends on the size of your credit-builder loan, it is smart to only borrow an amount that will translate to an affordable monthly payment. This is to ensure that you can easily achieve your goal of building a good credit score through timely monthly payments, which is the essence of taking a credit-builder loan in the first place.
2. Have a good understanding of the loan terms: To avoid any issues, ensure you have a good understanding of the loan terms before accepting a credit-builder loan.
3. Make timely payments: Since your payment history makes up 35% of your FICO credit score, making full and timely monthly payments will help better your score.
How a Credit-Builder Loan Can Improve Your Credit Score or Help You Build One
If you have poor credit score which you are hoping to improve, getting a credit-builder loan and making timely monthly payments will help, as your payment history composes 35% of your FICO score. Once you establish yourself as a responsible borrower who can be trusted to repay loans, your creditworthiness will improve.
On the flip side, if you don’t have any credit yet, credit-builder loans can also help you build one.
One must have and maintain a good credit score such as 670 or higher, as it comes with certain benefits. One is that it helps to easily qualify for different types of loans. It could also ensure that one gets loans with very low-interest rates.
Places to Secure a Credit-Builder Loan
1. Community banks: You can always contact a community bank to find out if they offer credit-builder loans.
2. Community Development Financial Institutions: You can also reach out to these private financial institutions that are particularly committed to offering affordable financial services to low-income and disadvantaged members of the community.
3. Credit Unions: Credit unions give out loans to their members based on certain factors. If you belong to a credit union, you can ask if they offer credit-builder loans.
4. Lending circles: Some peer groups are formed with the sole purpose of lending money to one other. The loan is usually interest-free and the loan terms are usually decided by the group. How it works is that each member pays a fixed monthly payment to a central fund and every month, a different member gets a loan. Some lending circles report to the three credit bureaus, so this is also a great option for credit-building loans.
5. Online lenders: Some online lenders offer credit-building loans. You can contact them.
Other Ways to Improve Your Credit Score
We’ve discussed at length what a great option credit-builder loans are for borrowers who are trying to improve their poor credit score or build one. However, other options could also be considered.
- Apply for a secured personal loan: Besides applying for a credit-builder loan, one of the other viable options for people trying to improve their credit score is secured personal loans. They are loans that you offer up a property of yours to get. Although this type of loan can help you build or improve your credit, the downside is that you run the risk of losing the property that you’ve put down as collateral if you fail to repay the loan as agreed.
- Use Experian Boost: You could also use Experian Boost, which is a free feature that lets you incorporate qualified rent, utility, cellphone and certain streaming service payments into your Experian FICO Score.
- Get a secured credit card: Another option is to get a secured credit card. When using a secured credit card, you are expected to make a deposit, generally $200 to $2,000, which will become your credit limit. If you use the card responsibly, by charging bills to it and making timely payments each month, the bank may be open to the possibility of converting it to a regular unsecured credit card.
- Apply for an unsecured loan: You could also apply for unsecured personal loans which are loans that don’t require collateral. Like secured personal loans, making timely payments on these loans can help improve your credit score.
Best Credit-Builder Loans in 2024
Many financial institutions offer credit-builder loans, and these loans usually have different interest rates, loan amounts, fees, and payment rules. As a borrower, you must get yourself familiar with some of the best lenders, so you can compare terms and pick the right fit for you. Here are some great credit-builder loan options:
- Self: Previously known as Self Lender, this lending platform is major in helping borrowers build and improve their credit. It also offers a package whereby if you open a credit-builder account, make three timely payments, have $100 or more in savings progress, and have a healthy account, you will be qualified for the Self Visa Credit Card which comes with certain benefits. It reports to all three credit bureaus and you can follow your credit score as it changes over time.
- Cheese: This is a lending company that helps borrowers build their credit by offering credit-building loans. It doesn’t do a credit check and it reports to all the three credit bureaus. It strives to help borrowers improve their payment history, length of credit history, and account mix. Also, it doesn’t charge administrative or membership fees.
- Chime: Another great lending platform that offers credit-builder loan is Chime, a financial technology company with a Credit Builder card issued by Stride Bank N.A. It also reports to all three credit bureaus, which means if you ensure to make timely payments on your loan, it will improve your credit score. It conducts its activities both online and offline.
- CreditStrong: It offers many credit-building products including credit-builder loans that can help you build credit. Its credit builder loan comes in three sizes, and you can choose your preferred option based on your financial ability.
Upsides of Taking a Credit-Builder Loan
- Accessible by borrowers with all forms of credit score: Regardless of your credit score’s status, you can always take credit-builder loans, which you can either use to build your credit or improve it.
- Build a savings account: Since you will be putting money in an account which you won’t have access to for now, this will help you save up, and you can retrieve your money once you’ve made all the necessary monthly payments.
- Build your credit score quickly: Even though the terms of these loans usually last several years, it tends to have a quick impact on your credit score.
Downsides of Taking a Credit-Builder Loan
You could damage your credit score even further: If you are unable to make timely payments or miss your payments, it will end up damaging your score even further.
There may be a need to pay interest: Imagine paying interest on money that you can’t touch until you are done with repayment, this can be frustrating.
You may have to pay some fees: Some lenders charge application fees, and if you miss your payment date, you may also be charged a late fee.
In a nutshell:
Credit-builder loans can help to build a credit history or improve an existing one while simultaneously allowing borrowers to save for the future.
Before opting for this loan, ensure that you have the financial capability and discipline to make timely monthly payments, as failure to do this will only end up hurting your score even further.
We hope we’ve been able to help with Credit Builder Loan and All You Need to Know in 2024.