Editor's choice: Self Lender - Credit Builder Account
- Start with as little as $25/month
- Save for 12 or 24 months
- Money is FDIC-insured and earns interest
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Because lenders rely on your credit score to determine if you’ll pay back your debt, your damaged credit history or no credit history at all can narrow your options and make approval difficult. If you’re in this situation, consider a credit-builder loan — a little-known tool designed to establish or boost your credit.
Our guide goes into how credit-builder loans work, where you can get one and what you should consider before applying.
A credit-builder loan is exactly what it sounds like: a loan that helps you build or rebuild your credit. Typically offered by credit unions and banks, they’re loans for small amounts from $500 to $1,500 for people who have bad credit, minimal credit or no credit at all. Even though credit-builder loans are a form of unsecured credit, because you won’t have access to your funds right away, interest rates can be low.
With a credit-builder loan, your loan money is put into an account that you can’t access until you finish paying off the loan in full. It sounds strange at first, but think of it as a loan layaway. Once your loan is satisfied, you end up with an improved credit score, because you’ve responsibly made payments over the course of 12 to 24 months. And once everything is paid for, you’ll have set aside unrestricted cash in a savings account to use however you wish.
Unlike secured credit cards, credit-builder loans don’t require a deposit — which means you don’t already need savings to get one. And because they’re designed to help people improve their credit, your payments are reported to the three main credit bureaus.
As long as you budget well and deposit your payments on time, this can be an easy, hassle-free way to build a credit history.
Credit-builder loans aren’t the most common way to build or rebuild credit, so you’ll have to do a little work on the front end to find a lender offering one. But because they’re a secure, safe means of improving your credit score, they’re worth the extra effort.
Find a credit-builder loan at:
If you can’t afford to wait for your credit-builder loan to mature, you have alternatives that can get you funds within a few days of approval. But these options vary widely in features, eligibility and interest rates.
Like many other forms of credit, these options require you to pay back your debts on time through monthly or bimonthly repayments. If you make a late payment or miss one, it can negatively affect your score.
Make sure you can afford to take on extra debt before you agree to a loan. Otherwise, you could find yourself in a debt spiral and worse credit problems than when you began.
Among the many options you have when looking to build your credit score, a credit-builder loan is designed to rebuild your credit while saving unrestricted funds for a rainy day. They’re easy to apply for and a safe investment for your future.
Before you make your final decision, look into other loan options that might be a fit for your needs.
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