Credit builder loans are a great tool for saving money as you build credit.
There are plenty of reasons you might need to build up your credit: you may be just starting out financially, either as someone who is on their own for the first time or someone who is new to this country. Or you could have taken a few credit missteps along the way and wound up with less-than-stellar credit. Either way, you hurt your chances of getting the best rates on a loan or even getting a credit card. So, what can you do? One option is a credit builder loan.
Credit builder loans are a lending product that is specifically made to help people build credit. Just like traditional banks, credit-building lenders report payment history to the three credit bureaus: Experian, Equifax, and TransUnion. That means getting a credit builder loan can be a good way to build good credit. You can use them in place of credit cards or alongside credit cards to improve your score.
What is a Credit Builder Loan and How Does It Work?
Credit building loans are pretty straightforward. They are loans you take out to build your credit. There are a few quirks to it though, the main one being that even though you are being “loaned” the money, you can’t actually use any of it.
When you take out a credit building loan, the bank puts the money in a savings account or other savings product, like a Certificate of Deposit. You don’t have access to funds while you make monthly payments for a certain period of time. Once the loan is “paid off,” you get that money and a boost to your credit score!
How to get a credit builder loan
Option 1: Go to a bank or credit union
A credit builder loan is one of the best ways to build credit without a credit card. The only real requirement is that you have enough income in order to pay back the loan. It’s important to know that not all banks issue these credit-builder loans. In fact, many of the bigger banks do not. Try looking at smaller community banks and credit unions when looking to open a credit-builder loan.
Option 2: Find a loan online through Self Lender
There are other places who offer credit builder loans, including the online company Self Lender. It gives individuals the opportunity to open a self-loan online with lower interest rates. The company states that rates will not be more than 16 percent interest. They also report to the three credit bureaus, so it helps your credit. Here’s how Self Lender works:
- You pay an initial non-refundable administration fee (between $9 and $12).
- Then you pay a monthly payment of your choosing (the lowest amount is $25 per month).
- After between 12 and 24 months, you will get most of that money back with interest. Choosing a larger monthly payment shortens the term; choosing a smaller payment will result in a smaller term.
Option 3: Go through a lending circle or CDFI
There are also lending circles and a kind of bank called a Community Development Financial Institution, or CDFI, that also offer these “fresh start” loans. Lending circles are run by the non-profit Mission Asset Fund and work by creating “circles” of individuals in your community to loan you money. Each month when you make a payment, you are essentially paying off one of the individuals within the circle, until you have made all the payments. This option reports to the credit bureaus but is a little more involved because it requires taking financial education courses and applying to be in a circle.
Lastly, a CDFI can either be a regulated institution, like a bank or credit union, or a venture capital fund, that is accredited to serve individuals in low-income communities who may not have access to traditional financing. While not available everywhere, these lenders give you options not only for credit-builder loans but also first-time mortgages and more to help build up the community surrounding them.
While you can build credit with secured credit cards and store credit cards, a credit builder loan is great for establishing credit while also saving money. It’s important to understand there is no “fast” way to build credit. Building up good credit takes time. You have to make payments on time and be responsible with your credit and loan choices so that you do not overspend or wind up unable to repay your loans. Start to build up your credit by paying bills on time and work to understand the best way to use credit cards. Your credit score will eventually reflect your efforts, and you will be a responsible credit user.
Article last modified on December 13, 2018. Published by Debt.com, LLC . Mobile users may also access the AMP Version: Using a Credit Builder Loan - AMP.