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! A credit builder loan is a small loan designed to help you build credit and savings at the same time. Instead of getting the money upfront, the loan amount is held in a savings account or certificate of deposit (CD) while you make fixed monthly payments, and it's released to you once the loan is paid off. Because your payments are reported to the credit bureaus, each on-time payment adds to your credit history. It's a practical option if you have little or no credit, or if you're rebuilding after some setbacks and haven't been able to qualify for a traditional loan or credit card.
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.
A credit builder loan is less helpful if you're already juggling other debt. In a Consumer Financial Protection Bureau study, participants who were already carrying debt didn't see the same benefit, likely because the extra payment was harder to keep up with alongside their other bills. In that situation, putting that money toward paying down what you already owe is usually the better move.
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, esearch from the Consumer Financial Protection Bureau (CFPB) shows how much of a difference these loans can make. In its 2020 study, people who didn't have an existing loan were 24% more likely to have a credit score after opening a credit builder loan. Participants with no existing debt also saw their credit scores rise by 60 points more than participants who were already carrying debt, and the loan was linked to an average increase of $253 in savings balances.
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.