What Is a Credit Builder Loan and How Can It Boost Your Credit Score?

A credit builder loan is like manna from heaven for people who have poor credit or little to no credit history. But why is that? It is because this type of loan helps them build credit. Once they are able to achieve a good credit score, it becomes easier to get a credit card, and they are more likely to negotiate for better interest rates in the future.

What makes credit builder loans unique is that they do not require good credit for approval. However, the lender will require you to have much income every month such that you can afford the monthly payments. When you borrow money, the lender will hold the amount you borrowed in a bank account while you keep making regular payments. They will report your untime payments to the three major credit bureaus, Equifax, Experian, and TransUnion.

What is a Credit Builder Loan?

Since they calculate credit scores from the data that come from your credit reports, making on-time payments will have a big positive impact on your score. So, what exactly is a credit builder loan? For many borrowers, the hardest part of building good credit—whether from scratch or while repairing a bad credit history—is patience. You need enough time to show lenders that you are a trustworthy borrower who makes payments on time consistently. A credit builder loan can be one of the best ways to jump-start your journey toward a strong credit history.

How It Works

⦁ Deposit a small amount of money into a secured savings account for the borrower.
⦁ The borrower begins paying it back in small monthly installments over an agreed period of time.
⦁ Provided the borrower has fully paid off the loan, the bank then releases the money to the borrower.
⦁ Lenders report these payments to credit reporting companies.
⦁ The borrower build a solid credit report.

How a Credit Builder Loan Boosts Your Credit

A credit builder loan helps individuals build credit by giving them an opportunity to demonstrate their creditworthiness through small monthly payments. As borrowers make their monthly payments on time, lenders report these regular loan payments to credit reporting agencies. By doing so, the borrower’s credit history shows their ability to make consistent, on-time, low payments until the loan is fully paid off according to its terms.

After a borrower has started building a credit history and established trade lines and use, he or she begins to develop their credit score. FICO and VantageScore are the two most popular measures, and both range from 300 to 850.

Any borrower would want to target a higher score because it shows a long in positive history of responsibly using credit facilities. Naturally, when building your credit score, you will have to start from the lower end. However, after a year or so of borrowing and patiently repaying your loans, your numbers will begin to rise quickly.

In terms of credit scoring, the two most critical factors are your payment history and your debt utilization ratio, which is the amount of actual debt compared to the total amount of credit available to you.

Apply Only For Credit You Can Get

⦁ Length And types of credit in use and pursuit of credit
⦁ You could get several loans simultaneously
⦁ Apply only for credit that you’re some how sure you can
⦁ Credit builder loans are characteristically small
⦁ Apply At your local lender’s branch

Pure Credit Builder Loan

Pure credit builder loans achieve two important objectives for the borrower. It helps the borrower put up a savings account while building up credit at the same time. The lender puts the entire loan proceeds in a savings account under the borrower’s name, where it stays frozen until the borrower pays off the whole loan. The borrower does not need to make an initial deposit to the bank, but he has to make the monthly payments until the loan is paid off.

Afterward, the money goes to the borrower, and he can use it as the deposit on a secured credit card. More importantly, the loan history goes into his credit report and becomes a good entry to help improve his credit score. This strategy has many other uses, such as building savings for a down payment for a car. Adding good entries into your credit history will improve your credit score over time, and once you have a more ideal score, you can haggle for a lower interest rate on an auto loan.

Shared Secured Loans

1. Deposit a sum of money into a savings account
2. The lender uses a savings account as collateral for the loan
3. Credit bureaus watch the revolving and installment credits
4. Ideal for consumers who want to start a credit history

How Can You Get a Loan To Build Credit

Now let’s see how you can get a loan to build credit. Credit builder loans can be an easy way to build or rebuild credit, but they are not the most common. It would take some effort on the borrower to find a lender that offers one, but since they are a secure safe means of improving a credit score, they’re worth going to great lengths to find one. You may look for a credit builder loan at the following.

1. Credit Unions:

Credit unions offer the same line of products and services like a traditional bank, but they are also a non-profit entity. Plus, they offer other services including credit builder loans. They will also keep the money they lend in an account until the borrower completes the term, which is anywhere from 12 to 24 months. Their interest rates are slightly lower than with other unsecured loans, and many credit unions put the funds in an interest earning savings account, so that also helps a little.

2. Local Banks:

Local banks would also be happy to supply you with a credit builder loan. Most national banks do not offer credit builder loans and will often suggest that you get a credit card instead. You might have better luck with a local bank that can offer a personal loan that you secure by your funds until the end of your loan term. At the proper time, you can choose to withdraw the total amount you’ve saved or keep them in the bank as a nest egg. It all depends on what you think will be of most financial benefit to you in your situation.

3. Online Lenders:

The good thing about online lenders is that you can rebuild your credit without having to actually leave your house. Businesses such as self lender work through banks and give out small loans that borrowers can repay over a year. You need a certificate of a deposit to secure your loan until it’s paid off, while in the meantime your lender reports your payment activities to the three major credit bureaus.

Alternatives to Credit Builder Loans

• Apply for a secured credit card
• Try to Get an Unsecured personal Loan
• Joint account holders or authorized users

Should You Try a Credit Builder Loan?

We can all agree that a credit builder loan is a good way to build your credit, but it’s crucial that you are certain that financially you can afford it. Compute how the monthly payments will impact your budget, if at all. It’s never wise to get any loan that would turn your budget upside down because it would normally cause you to fall behind on your other bills in debts. This would in turn hurt your credit score instead of making it better.

Remember that in many cases you’ll be advancing your own money, and you may not get it back for several months or even a couple years, and that would depend on the size of the loan and how much your monthly payment would be. Remember to that you will be paying interest that goes to the lender and does not go back to you at the end of the loan term. Using this type of loan will cost you money. It would be a bonus if you can find a lender that will refund the interest charges if you make all of your payments within their due dates.