If you are just starting in terms of building up your credit and therefore establishing a credit history, then it could be difficult for you to qualify for loans and/or credit cards that would enable you to start establishing that credit history. This is where a credit builder loan comes into play. A credit builder loan can help you to begin building your credit and thereby make it easier for you to get approved for loans as well as for more favorable terms on credit cards and various financial products. The good thing about a credit builder loan is that you do not need a long credit history nor even good credit to qualify. In this article, we look closer at what exactly credit builder loans are and how they can potentially help you.
Keep in mind, with credit builder loans if you have significant debt currently, this loan may not be able to help you. Best for those new to the credit scene, experts suggest that a credit builder loan could help you increase your credit score by anywhere from 50 to 60 points.
Understanding how a credit builder loan works
Sometimes referred to as fresh start loans, credit builder loans are often associated with smaller banks and/or credit unions. How these types of loans work are going to be a bit different than how you might think of a typical loan working. Rather than the bank issuing you the funds upon loan approval, the money is held in the bank. Once you've repaid the loan in full, this is when the money is released to you. So in essence, you are going to be making monthly payments for money to be used at a future date.
This type of loan structure serves to protect the lender. If someone has a low credit score or no credit score, there is generally risk involved with lending them money. However, with a credit builder loan, the bank has the money within its possession and so in the event of a default they are not losing anything. You might think of it as establishing a type of savings account by paying money into the said account every single month. Every loan payment you make is reported to the credit bureaus allowing you to start building a positive credit history. The key is to make those payments on time, otherwise, this could adversely impact any credit history you are trying to build.
Selecting a credit builder loan
Choosing a credit builder loan and selecting a lender with which to work is not a process you should take lightly. You want to make sure that the monthly payments and terms are such that you can comfortably afford them so that you do not get yourself into financial trouble—remember, this is about establishing a good credit history and score. Also, keep the amount of money you borrow overall manageable. In other words, do not bite off more than you can chew as far as the amount you are going to need to pay back over time. And one of the more important details to look into when selecting a credit builder loan is to choose one that reports to all three of the major bureaus so that you do start to build up that credit history.
As noted, making your loan payments on time is a critical part of this process. You want the lender to report positively to the credit bureaus so you can start boosting that score. If your payment is thirty or more days late, this will hurt your credit report and score.
After you've completed all loan payments and thus have access to the full amount of the loan, then you need to determine what you wish to do with the money. Going out and spending it all at once probably isn't the smartest move. You might want to consider putting a large portion of the money away as an emergency fund. This way if something unexpected comes up you have the funds to handle the situation.
Where can you get a credit-builder loan?
Credit unions or smaller banks: You of course can start by searching for credit builder loans online, however, you might also consider starting at local banks and credit unions as this is often where people get these types of loans. When working with small local banks and credit unions, you might find that they offer more favorable terms and lower interest rates on a credit builder loan.
Online lenders: Very frequently you can find credit-builder loans through online and alternative lenders. Sometimes you can find such loans with very low monthly payments--less than fifty dollars a month. If you are just starting especially and need to establish credit this can be a very affordable solution.
Some other options
- Oftentimes, people with less than stellar credit will ask a relative if they can be listed as an authorized user on one of their credit cards. In doing this, the account history of that card counts toward your credit history. So if the person has made prompt payments and has successfully utilized that card, this could be a very good thing for your score and history.
- Taking out a secured credit card is another way to help build up your credit. With a secured card you will put money down and you can only use up to the amount that you deposited. Again, as long as you make timely payments this could go toward helping to establish a better credit history.
- There is also the option of taking out an unsecured personal loan. This is a loan given without collateral or a down payment. Keep in mind, that if your score is not that great you likely will be facing pretty high-interest rates on this type of loan.