A credit builder loan offers a way for people with limited or poor credit history to increase their credit scores. They’re typically offered by small financial institutions and credit unions, and are generally easy to qualify for. A credit-builder loan helps you establish a credit history and can help boost your record of on-time payments, both of which can build your credit score. This can help you secure favorable terms and rates on future financing options such as mortgages, car loans and more.
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A credit-builder loan, also known as a fresh start loan or secured installment loan requires that you place the approved loan amount in a savings account. The lender holds this loan amount as collateral, in case you can’t make payments. As you make timely payments towards your credit-builder loan, your lender updates the credit bureaus. By slowly meeting your payments, your credit score increases, assuming your financial situation elsewhere is the same.
When you pay off your credit-builder loan, your lender returns the amount in your savings account to you with any interest earned. You’ll find that these loans can trend up to $1,000 with repayment terms up to two years.
Are credit building loans worth it?
Credit building loans are worth it if you have poor credit or are just starting out in building your credit history. However, like with any loan product, if you miss your payments or overspend elsewhere you’re at risk of lowering your credit score and racking up fees and interest.
Where to get a credit builder loan?
You can apply for and receive a credit builder loan through the following institutions:
Credit unions. These community financial institutions usually have less stringent requirements and offer lower rates than traditional banks.
Debit-credit card. These hybrid cards work like regular credit cards but draw funds from your checking account. Your credit card company reports these payments to the credit bureaus.
Credit building apps. You can consider credit-building apps such as Experian Boost and Cushion which provide credit builder loans, secured credit cards and bill reporting to help you increase your credit.
A credit builder loan is an option for those with poor or little credit history to build their credit score. However like with any loan, if you don’t make your payments on time you can rack up additional fees or interest as well as lower your credit score. A credit-builder loan is just one option among many ways to build your credit.
Dhara Singh is a freelance personal finance writer at Finder specializing in loans. Formerly she was a top 10 journalist at Yahoo Finance with more than 38+ million content views where she covered retirement and mortgages. She has also written for Bankrate, and CNET and continues to write for a variety of outlets, such as Investopedia and Worth magazine. Her articles focus on equipping readers with the right information and data so they can make the most informed decisions related to their finances.
Dhara previously worked as an insights analyst for Finder’s PR team, where she started the Deadliest Cities to Drive series in 2018, connecting interesting data analysis to a suite of car insurance products. When she’s not writing, Dhara coaches small business owners through her Stories to Sales programs and empowers them to use their life experiences to help other people. She has also self-published a poetry book on Amazon called Tell her She’s Lovely.
Dhara holds a B.S. in Finance and Supply Chain Management from Rutgers University and a M.S. in Journalism from Columbia University.
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