What Is A Credit Builder Loan And How It Helps Build Your Credit
What Is A Credit Builder Loan And How It Helps Build Your Credit
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December 20, 2022
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A credit-builder loan is designed to help people to improve their credit scores. Have a poor credit score, or don’t have a credit history at all? A credit-builder loan would be a great choice for you.
Different from a traditional loan, a credit-builder loan asks you to make fixed payments into a bank account ahead of time. At the end of the loan term, you will get the money back minus the interests you paid. The lender will report your on-time payments, which helps to build your credit.
Want to learn more about how to build credit or repair bad credit? Read on this article, we’ll tell you the things you need to know about credit-builder loans.
- How does a credit-builder loan work?
- Why does a credit-builder loan help to build your credit?
- Can credit builder loans hurt my credit score?
- Tips for managing a credit-builder loan.
- Other options to build or rebuild your credit.
- Recommendations for credit builder loans
How does a credit-builder loan work?
A traditional loan gives you the money you’re borrowing upfront, and then you pay it back over time. In this way, lenders face a relatively high risk of not getting the money back, so they require good credit scores. A credit-builder loan holds the opposite logic. Here’s what happens after your credit-builder loan application is approved:
- The lender holds the money in a credit-builder account. The lender will hold the loan in your name in a secured savings account or a certificate of deposit. According to the Consumer Financial Protection Bureau, the loan amount falls typically from $300 to $1,000.
- You make monthly fixed payments. You will make monthly payments - both the loan principal and interest - to the lender. The loan term is usually around 6 to 24 months.
- The lender reports your payments. The lender will report your timely payments to at least one of the major credit bureaus, TransUnion, Equifax, and Experian.
- You receive the money. After you make full payments for the whole loan term, the lender will release the funds to you. Sometimes the money comes with the interest you paid, but this differs by lenders.
Because you make payments before you get the loan money, lenders face lower risks. Therefore, they don’t need you to have a high credit score as proof of your financial ability. They can lend you money with no credit check.
Why does a credit-builder loan help you build credit?
A credit-builder loan offers you an opportunity to prove your capability of making on-time payments. After you make on-time payments, the lender reports these payments every month to the major credit bureaus that collect your credit data and form your credit report. This can help you build positive credit history, because the payment history on your credit report is the most significant factor in calculating your credit score. The most popular credit scoring model FICO sees payment history as the biggest contribution to a credit score, which accounts for 35%.
Remember to make your payments on time! Because your lender report all your payments - timely payments, late payments, missed payments - to the credit bureaus. Late and missed payments can hurt your credit score.
Can credit builder loans hurt my credit score?
There are some scenarios in which a credit builder loan can hurt your credit score:
- When a lender performs a hard pull (also known as a hard inquiry) on your credit score when you apply, which might drop your credit score by 5-10 points. So find the lenders that don’t perform a hard pull on your credit!
- When you have missed payments or late payments, as mentioned above. This will hurt your credit score because the lenders do not only report your on-time payments but also your missed payments and late payments.
Tips for managing a credit-builder loan
1. Compare different lenders and choose the best credit-builder loan for yourself.
The loan amounts, interest rates, loan terms, how your payments get reported, and other fees vary among credit-builder companies. Compare carefully between lenders and choose the loan plan that suits you the best.
2. Choose the loan amount that you can cover.
Credit-builder loan limits usually vary from $300 to &1000. A larger amount makes you repay more every month. Only borrow the amount you can afford; otherwise, it will even hurt your credit if you fail to make the payments.
3. Make sure you make full payments on time.
Remember, credit-builder loan companies not only report your timely payments but also report your late and missed payments. If you fail to do this, it will cause negative information on your credit report, thus hurting your credit score.
More options to build or rebuild your credit
1. A personal loan:
Personal loans include secured personal loans and unsecured personal loans. A secured personal loan requires collateral, in case the borrower doesn’t repay the loan as agreed. Therefore, there is a risk that you lose the collateral, which could be your house. An unsecured personal loan is likely to charge high-interest rates, but they could accept bad-credit applicants.
2. Become an authorized user:
Ask a family member or a friend to add you as an authorized user. After that, you can make payments but are not responsible for paying the debts. The payment history of the credit card account will show up on your credit report, which helps you build your credit. Besides, there is normally no credit check to become an authorized user. If there is negative information in the payment history, you can also request to remove this account from your credit report. However, not all credit issuers report an authorized user’s account to the credit bureaus.
3. A secured credit card:
To get a secured credit card, you are required to deposit your credit limit. The amount usually varies from $200 to $2,000. This reduces the creditor’s risk of the borrower not paying off the loan so a poor credit score is accepted. Usually, the deposit is refundable. Remember to check whether the credit card company reports your secured credit card payments to the credit bureaus. Without this, you can’t build your credit.
Recommendations for credit builder loans
Any recommendations for credit builder loans? Sure.
Check out the Cheers Credit Builder Loan. Remember what we mentioned about what to consider when comparing credit builder loans? Check the loan amounts, interest rates, loan terms, how your payments get reported, other fees, and whether the lenders perform a hard pull on your credit score. With Cheers, you can choose the loan amounts and loan terms that you feel most comfortable with. Cheers reports your payment history to all three credit bureaus. Besides. you don’t need to worry about missing payments or late payments, because Cheers has the auto-save function to make sure all your payments are on time!
With no admin fees and no credit check at all, Cheers makes credit building easy for you. Sign up today!
