If you’re looking to build credit, there are a few better options than loans to build credit. However, if you don’t take the time to find the right one, the results could be disastrous – both to your finances and your credit scores. To help you navigate the loan-building process, we’ve put together this guide on how to choose the best loans to build credit and how to manage them once you’ve taken them out.
What are Loans to Build Credit?
Loans to build credit is a type of loan that can help you improve your credit score.
There are many different types of loans that can help you improve your credit score but not all of them will work for everyone. You’ll need to find the right type of loan for your needs and make sure you make all of your payments on time in order to improve your credit score.
A loan to build credit can help you improve your credit score by adding positive information to your credit report. When you make timely payments on a loan it shows creditors that you’re a responsible borrower and helps improve your chances of getting approved for future loans.
You typically borrow between $300 and $1,000 when you take out a credit builder loan, but the catch is that you don’t actually receive access to the money until you’ve already paid the full loan amount back.
Your savings account is opened with the money you borrow. Based on your interest rate and the amount borrowed, you will make monthly payments. The lender will record your monthly payments to Equifax, Experian, and TransUnion, the three credit agencies. The money that the lender deposited into your savings account will be returned to you once the entire borrowed sum has been repaid.
In other situations, you’ll get the money you borrowed right away, but you’ll need to put it in a savings account as a security deposit for the credit builder loan. Rarely, you may be able to obtain a loan without putting money into an account to use as collateral and immediately access the funds. These loans typically have higher interest rates and are for extremely modest sums of money.
There is no risk to the lender providing you with a credit builder loan since you repay the loan before you get access to the money or because your loan is secured by money in your savings account. Since you end up with a nest egg in your bank account once you’ve paid back the loan amount and have access to your borrowed funds, these loans encourage you to save money while establishing credit.
Will a Loan to Build Credit raise my credit scores?
The answer is maybe. If the loan is from a traditional lender such as a bank and you make all of your payments on time it could help improve your credit scores. On the other hand, if you have a poor payment history or the loan is from a predatory lender it could hurt your credit scores.
After the approval of your application for a credit-builder loan, the following can be anticipated:
- Your lender sets aside the funds: According to the Consumer Financial Protection Bureau, your lender will open a savings account or a certificate of deposit (CD) with the loan amount, which is typical $300 to $1,000. The loan may accrue interest based on the account and the lender. You make monthly payments: You’ll pay back the loan in installments, usually over the course of six to 24 months, along with interest.
- Your lender should notify the credit bureaus about your payments: Your lender should notify at least one of the three main credit bureaus each month about the specifics of your payments, including whether they were made on time.
- You make monthly payments: You’ll pay back the loan in installments, usually over the course of six to 24 months, along with interest.
Your lender should notify the credit bureaus about your payments: Your lender should notify at least one of the three main credit bureaus each month about the specifics of your payments, including whether they were made on time. - Your lender will release the money: If all of your payments have been made on time by the loan’s due date.
Here are five options to think about if you’re interested in applying for a credit-builder loan.
The 5 best Loans to Build Credit in 2022
Self: Best for bad credit
Why Self stands out: According to the company, self credit-builder loans may be a smart choice for borrowers with bad credit and no outstanding installment loans. Repayment plans for credit-builders begin at $25 each month. Additionally, you can apply for a Self Credit Builder Loan without having a rigorous credit inquiry made.
You have the option to terminate the loan at any moment and receive your money back, minus interest and fees, from your savings account. (To obtain the loan, you must pay a non-refundable administration fee.)
MoneyLion: Best for quick access to cash
MoneyLion is unique because it allows you immediate access to a percentage of your loan proceeds. However, in addition to making monthly loan payments, you’ll also need to pay a $19.99 membership fee. Credit-builder loans up to $1,000 are available through MoneyLion.
MoneyLion can be an excellent choice for you if you need a way to establish credit but also require immediate access to some cash. Additionally, MoneyLion won’t do a hard credit check if you request a loan.
To assist you in keeping track of your credit ratings over time, MoneyLion also provides credit monitoring.
Credit Karma Money: Best free account
Although there is a minimum credit score requirement, Credit Karma Money won’t charge you interest to register a credit-builder account. If accepted, Credit Karma partner SeedFi opens a locked savings account and a $1,000 line of credit in your name when you sign up for Credit Builder through a Credit Karma MoneyTM Spend account.
You must put aside at least $10 every other week/semi-monthly or $20 each month if you choose automatic savings. You can use the money after contributing $500 to your credit line.
Digital Federal Credit Union: Best for full-service banking
Why Digital Federal Credit Union is unique: DCU, also known as Digital Federal Credit Union, offers a variety of banking services. In addition to checking accounts, vehicle loans, savings accounts, and retirement accounts, the lender also provides a range of other banking services.
Your DCU account will receive dividends from the funds you deposit for a credit-builder loan. Additionally, you won’t have to make any payments for the first 60 days if you’re authorized.
Due to the fact that DCU is a credit union, you must meet certain requirements in order to become a member, including working for a participating employer (DCU has a comprehensive list), having a family member who is a member, or belonging to a participating organization.
Strong Credit: Best for Larger Loan Amounts
Credit Strong offers a variety of credit-builder loan alternatives, but its Magnum accounts offer quantities of $5,000 and $10,000. This is why Credit Strong stands apart. Furthermore, applying doesn’t require a credit check or a down payment.
Magnum accounts are suggested by Credit Strong to persons who want to raise their credit scores in order to increase their chances of obtaining business credit in the future.
How to manage Loans to Build Credit?
Credit builder loans, as previously noted, can boost your credit, but they can also damage it if you don’t complete your payments on time. These pointers can assist you to make sure your efforts to raise your credit score with a credit builder loan are successful:
- Check your credit once a month: To make sure your good payment history is being properly reported as you pay off your credit builder loan. This will allow you to maintain track of your progress. You can also frequently check your credit score to see if it’s rising. You will be more motivated as a result.
- Pay your credit builder loan on time each and every time: Since you don’t have much of a positive credit history to make up for late payments, it is critical that you never miss a payment on your credit builder loan.
- Pay off your loan in full when it’s due: You should also make sure you have enough money set aside in your budget to cover the entire balance of the loan by the due date.
Where to find Loans to Build Credit?
Credit unions or community banks: Finding a credit-builder loan can be difficult. You can start by looking online for “credit builder loans,” and you could discover them through local community banks or credit unions. Membership requirements for credit unions frequently include things like relocating to a given county, working for specific businesses, attending a specific church, or giving a small amount to charity. They might, however, have the lowest interest rates. To be sure, check.
CDFIs: If a local community bank or credit union does not provide them, you might want to try a community development financial institution (CDFI). There are roughly 1,000 of these groups in the US, and they operate to support lower-income areas.
Online lenders: You can find lenders that provide credit-builder loans by conducting an online search. It’s crucial to confirm this because not every lender is authorized in every state. Payments, periods, and APRs all differ significantly.
Lending circles: A credit-building strategy made available by lending circles is one that can be used among family members or acquaintances. A lending circle initiative is conducted by the nonprofit Mission Asset Fund. Participants receive “social” loans without interest, and payments are recorded to credit bureaus. There is little availability. Lending circles are also offered by other businesses.
In these organizations, the 10 or so participants each agree to contribute a particular amount each month, and the money is distributed to one person in a round-robin way until everyone has gotten a share of the pot.
The Perils of Loans to build credit
Credit-building loans can help you establish a solid payment history when you might otherwise find it difficult to do so. This is one of their clear benefits. Nevertheless, there are dangers connected to these loans as well. Here are a few of the most pressing problems you’ll encounter.
- If you don’t make your payments on time, you risk damaging your credit: A credit builder loan is intended to help you raise your credit score, but this will backfire if you consistently make late or missed payments. A credit building loan should only be taken out if you are certain that you will be able to repay it when it is due.
- Some credit building loans impose application costs: Which means you can find yourself paying large fees. There may also be a late fee if you don’t pay your bill by the deadline. These prices could significantly increase.
- The interest rates on credit building loans are often under 10%: however, it is possible to pay interest on the money you do not yet have access to. However, it isn’t always the case. Additionally, paying interest on funds you cannot access until the loan is returned may frustrate you since you may feel like it is a waste of money.
Before borrowing, create a budget that accounts for your monthly payments. You can also browse around for a lender that provides the cheapest loans to reduce these risks. As long as you repay the loan on time, some lenders may even give you back the interest you paid.
Other options for building credit
One way to establish credit is with a credit-builder loan. Here are some additional methods you might be able to use to assist establish or repair your credit, regardless of whether you have bad credit or no credit history:
A secured credit card
Similar to an unsecured credit card, a secured credit card gives you immediate access to a line of credit that you can use for purchases. A security deposit is needed to start an account with a secured card, as opposed to an unsecured card.
Remember that refunds of security deposits are common.
Additionally, many secured credit cards don’t charge yearly fees.
Capital One is one of the credit card issuers that report the usage of secured credit cards to credit bureaus. Therefore, having a secured card could help you build better credit if you use it properly and make at least the minimum payment on time.
However, bear in mind that late or missed payments may damage your credit. As well as going over your credit limit.
Become a Registered User
You may become an authorized user on someone else’s credit card account if they are a loved one or someone else you trust. You are still able to make purchases thanks to this, but the principal cardholder is ultimately in charge of making payments. Additionally, its proper use might raise your credit score and help you establish credit. Additionally, there is typically no requirement to apply or run a credit check in order to become an authorized user.
Just make sure to ask the card issuer how they handle informing credit bureaus about approved users. If the issuer doesn’t disclose authorized user activities, you won’t be able to establish credit as an authorized user.
A Personal Loan
You can be eligible for personal loans even if you have bad credit or no credit, depending on the lender.
However, keep in mind that your alternatives may be constrained if you are growing or rebuilding your credit. For instance, you might only be eligible for a secured loan that needs collateral. Additionally, the lender may take your collateral if you miss a payment on your loan.
Payday loans are one type of personal loan that has particular dangers and are unlikely to help you improve your credit.
Conclusion: Loans to Build Credit can raise your score, but choose wisely.
Credit builder loans are an affordable approach to raise your credit score if you’re trying to do so. Don’t forget to take into account additional possibilities, such as requesting a secured credit card, to ensure that you have a variety of credit available to you. When you decide taking out this kind of loan is the best strategy to raise your score, make sure you look around to locate the most affordable credit building loan.