After your Social Security number, the most important number in your life is your credit score. Your score affects everything from the house or apartment you’re approved for to what kind of deal you can get on a new car.
If your credit is less than stellar — or if you have no credit history at all — you might have trouble getting any form of credit. If you do qualify, you might face high interest rates that cause your balances to grow over time. Boosting your credit score is an important part of improving your finances.
If you’re building credit for the first time or are trying to reset a bad credit score, one option that can help is a credit builder loan.
How is my credit score determined?
If you have credit cards, loans, or ongoing bills, the three major reporting bureaus — Experian, Equifax, and TransUnion — use that data to compile your credit history. Each company uses their own calculations to determine your credit score.
Credit card companies and lenders review your credit score to determine your reliability and creditworthiness. However, other entities look at your credit score, too. Potential landlords, utility companies, and even cell phone carriers might look it up when you apply. A poor score might mean you cannot get approved.
According to the Fair Isaac Corporation, the company behind the commonly used FICO score, the following factors determine your score:
- Payment history: Your payment history shows whether you have paid all of your bills on time. If you’ve missed a payment or fallen behind, that can affect your credit history. Your payment history accounts for 35 percent of your credit score.
- Amounts owed: Accounting for 30 percent of your score, the amounts owed category is how much of your available credit you use. The less you use, the better. For instance, if you have a $10,000 credit limit and only have a $1,000 balance, that’s much better than if you had a balance of $9,000.
- Length of credit history: Lenders want to see several years of credit history, which is why the timeline of your credit report accounts for 15 percent of your score. If you’re a new borrower or are just opening your first credit card, your score will likely be lower than someone with a longer history.
- Credit mix: Lenders like to see that you can handle multiple types of credit, rather than just relying on one credit card. Having a mix of different forms, such as credit cards and installment loans, contributes to 10 percent of your score.
- New credit: If you open up several different accounts in a short time frame, that can make lenders nervous and reduce your score. New credit accounts affect 10 percent of your credit score.
If you’re just starting out or are rebuilding your credit, improving your score can be tricky. You can’t improve your credit report without getting credit, and you can’t get credit without a strong credit report.
However, that doesn’t mean you’re out of luck. Credit builder loans can help you start building your credit history in a safe way.
What is a credit builder loan?
A credit builder loan is a small, short-term installment loan for those with poor credit or no credit history.
With a traditional personal loan, you submit an application to a lender. The lender looks at your income and credit score to determine whether to approve you. If they do approve your application, you’ll receive the loan amount in your bank account within a few weeks.
But when you apply for credit builder loans, no credit check is required in many cases. Because they work differently than regular personal loans, credit builder loans present less risk to lenders.
With a credit builder loan, you don’t receive the loan amount upfront. Instead, the lender deposits the amount into a savings account or certificate of deposit (CD) for you. Your payments each month go toward the loan, but you can’t access the savings account or CD until your payments total the amount you borrowed.
For example, Digital Federal Credit Union offers loans as small as $500 with repayment terms as long as 24 months. After making all the required payments, you will have $500 in a savings account that’s entirely yours.
The lender reports the loan and your monthly payments to the three credit reporting agencies. If you made all of your payments on time, a credit builder loan can improve your credit score.
It’s important to know that credit builder loan lenders don’t only report positive information to the credit reporting agencies. If you make late payments, the company will submit that information, as well — harming your credit score.
How can I find a credit builder loan near me?
Some of the best credit builder loans are often offered by credit unions or nonprofit organizations.
If you have a savings or checking account with a credit union, you can ask a representative about credit builder loan options. For those who don’t have a credit union already, you can use a credit union locator tool to find one near you.
Local nonprofits whose missions are focused on financial literacy and stability might offer credit builder loans, as well. The Credit Builders Alliance, a nonprofit that encourages financial institutions to report alternative loans to the major credit reporting bureaus, maintains a searchable database of organizations that offer credit-building loans and other financial programs.
Can I get credit-building loans online?
If you can’t get a credit builder loan from a local credit union or nonprofit, there are online options you can use, such as Self Lender.
Self Lender, available to residents in all 50 states, offers credit builder loans ranging from $525 to $2,200. It partners with multiple banks to issue loans and report the information to all three credit reporting agencies.
If you’d like to apply for a loan with Self Lender, you must:
- Have a bank account, debit card, or prepaid card
- Have an email address and phone number
- Know your Social Security number
- Be a permanent U.S. resident with a physical U.S. address
- Be at least 18 years old
The company says you can apply for a loan in as little as five minutes. Once you create an account, the site will prompt you to enter information like your address, income, and Social Security number.
If Self Lender approves you for a loan, you will owe a $12 to $15 administrative fee. The company will deposit your loan into a CD account that earns an annual percentage yield of 0.10%. After you complete your repayment term, Self Lender will release the CD with its accrued interest to you.
If you can’t make the payments, SelfLender allows you to cancel the loan early for a fee.
Improving your credit history
If your credit score is in need of help, a credit builder loan can be an excellent tool to give it a boost. However, it’s not the only option you have to improve your credit. For more ideas, check out the best secured credit cards to rebuild credit.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|6.26% – 14.87%1||$5,000 - $100,000||Visit SoFi|
|6.99% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|6.99% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|