Credit Builder Loans: What Are They and How Can They Help You?
Building credit can feel like trying to solve a puzzle with missing pieces. If you’re just starting your financial journey or rebuilding after some...
3 min read
Jenna Taubel
:
Jan 10, 2023 5:45:00 AM
How do you build credit if you can't get approved for loan? One solution is a credit builder loan, it's a unique type of loan that helps you actively save money while building a credit score at the same time! There are many benefits to using a credit builder loan to improve your financial situation.
Credit building loans function the opposite way of a regular loan. With a typical loan you receive a lump sum of money upfront, and then you pay that money back over a specified period of time. With a credit builder loan you still pay installments over time, but those funds are then deposited into a savings account or certificate of deposit (CD) and held there for the duration of the loan, after the term is up, those funds are released to you. So instead of receiving that lump sum upfront, you received at the money at the end of the loan.
This helps you build credit because your payment history is reported to the credit bureau monthly just like with a typical loan. Also, like a typical loan there is an interest rate charged for the loan that is included as part of the payments. That being said, the funds that are placed into the savings account, also earns the interest at the designated rate for that account. Think of it is as a scheduled series of savings deposits that help improve your credit standing.
Yes, credit builder loans are great options for building your credit! A credit builder loan can also help you establish good money behaviors, such as making on-time payment and saving for a goal. Learning these important financial skills can prepare you for more easily accessing other financial products, such as credit cards or personal loans in the future.
Additionally, credit builder loans are a good idea for you if you do not have other outstanding debt on your credit report. This is because if you’re already debt laden the better way to improve your score is to focus on paying down your existing debts in a timely manner.
Credit builder loans have many advantages to consider, but they also come with a few disadvantages as well. When determining if a credit builder loan is the best solution for your financial goals, it's a good idea to review both the benefits and drawbacks.
Credit builder loans are designed to help you get started on the path to positive credit history quickly. Most people are able to achieve a credit score within six months of making payments to their credit builder loans. Keep in mind that establishing a good or excellent credit score will take longer, but we all have to start somewhere. Most credit builder loans range in term from 12 month to 36 months.
Moreover, research from the Consumer Financial Protection Bureau (CFPB) indicates those who applied for a credit builder loan increased their likelihood of a positive credit score by 24%. Additionally, those who took out a credit builder loan without any existing debt experienced an increase by 60 points in their credit score and increased their savings balances on an average of $253.
If you have no credit history or have damaged credit then a credit builder loan could help you establish a positive credit history quickly, while saving money and avoiding debt. If you'd like more information about how a credit builder loan can benefit you please do not hesitate to contact our team.
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