{"id":2021,"date":"2019-03-08T12:29:48","date_gmt":"2019-03-08T12:29:48","guid":{"rendered":"https:\/\/www.loanry.com\/blog\/?p=2021"},"modified":"2022-11-24T12:10:33","modified_gmt":"2022-11-24T12:10:33","slug":"does-a-credit-builder-loan-really-work","status":"publish","type":"post","link":"https:\/\/www.loanry.com\/blog\/does-a-credit-builder-loan-really-work\/","title":{"rendered":"Does a Credit Builder Loan Really Work? Loan Up!"},"content":{"rendered":"

[vc_row][vc_column css=”.vc_custom_1669291768378{margin-top: 1em !important;}”][vc_single_image image=”2100″ img_size=”full”][\/vc_column][\/vc_row][vc_row][vc_column css=”.vc_custom_1648234281494{margin-bottom: -1.2em !important;}”][vc_column_text]In case you weren\u2019t aware, building your credit score is a necessary part of life in modern society. If you want to buy a car, a house, or some other significant purchase, then your credit must be in good shape. There are many ways to build credit and credit builder loan is on of those options.<\/p>\n

Unfortunately, most people don\u2019t have the best credit, which can severely limit the options available. Thankfully, however, improving your credit score can be as simple as getting a credit builder loan.<\/p>\n

Today we\u2019re going to dive into the world of credit builder loans – what they are, how they work, and whether they\u2019re a good option for you.[\/vc_column_text][\/vc_column][\/vc_row][vc_row][vc_column css=”.vc_custom_1648234296586{margin-top: -0.7em !important;margin-bottom: -1.2em !important;}”][vc_column_text]<\/p>\n

How Does a Credit Builder Loan Boost Your Credit?<\/h2>\n

If we want to understand how these loans can help your credit score, it\u2019s best to know what the three credit bureaus pay attention to when assigning a score to you. Knowing what factors lenders look at on your credit report<\/a> is an important personal finance lesson. There are a handful of different factors at play, so let\u2019s look at them one by one.<\/p>\n

First, let’s find out what is a credit builder.[\/vc_column_text][\/vc_column][\/vc_row][vc_row][vc_column css=”.vc_custom_1648234336484{margin-top: -0.7em !important;margin-bottom: -1.2em !important;}”][vc_column_text]<\/p>\n

What is a Credit Builder Loan?<\/h2>\n

Technically speaking, this isn’t a loan in the traditional sense. With most loans, you\u2019re borrowing money from a lender, which you have to pay back within a specific time frame. However, in this case, what you\u2019re doing is paying into a savings account<\/strong>. The terms and conditions of the \u201cloan\u201d are similar to any other that you would do, except for one critical difference – in the end, you get to keep the money.<\/p>\n

Working with your financial institution, you can set a predetermined amount of money to pay for the loan (i.e., $5000), and a minimum monthly amount. The funds go into your savings account, meaning that you get to keep all of the money you\u2019ve paid<\/strong>. It\u2019s like a contract forcing you to save money.<\/p>\n

There are two types of credit builder loans you can get: pure credit builder loans and share secured loans.[\/vc_column_text][\/vc_column][\/vc_row][vc_row][vc_column css=”.vc_custom_1648234410578{margin-top: -0.7em !important;margin-bottom: -1.2em !important;}”][vc_column_text]<\/p>\n

Pure Credit Builder Loans<\/h3>\n

The way this option works is that the lender will put the total amount of a loan into your savings account<\/strong>. You make monthly payments until you\u2019ve paid the whole amount, after which all of the money is yours to keep.<\/p>\n

In many cases, you can then use this total as a deposit on a secured credit card, or as a down payment for something else (i.e., a car). What\u2019s nice about this loan as well is that there is no minimum deposit to get started.[\/vc_column_text][\/vc_column][\/vc_row][vc_row][vc_column css=”.vc_custom_1648234182029{margin-top: -0.7em !important;margin-bottom: -1.2em !important;}”][vc_column_text]<\/p>\n

Share Secured Loans<\/h3>\n

In this case, rather than having the lender provide all of the funds into your saving account initially, you are the one making a deposi<\/strong>t. For example, if you have $2000 available, you can put it into a shared secured loan savings account, where the money will be frozen.<\/p>\n

Unlike a pure credit builder loan, payments you make will unfreeze an equal portion of the \u201cloan\u201d.<\/strong> So, if you\u2019re making $200 payments each month, both the payment and $200 of the balance will be available to you immediately.<\/p>\n

Typically speaking, these are short-term loans<\/a>, assuming that you don\u2019t have a ton of money to put into a savings account. However, they can still boost your credit by several points, which can make a substantial difference if you\u2019re on the edge of going from \u201cfair\u201d to \u201cgood\u201d on your credit score.[\/vc_column_text][\/vc_column][\/vc_row][vc_row][vc_column css=”.vc_custom_1648234170045{margin-top: -1.3em !important;}”][vc_tta_accordion style=”modern” color=”purple” gap=”2″ active_section=”1″ collapsible_all=”true” title=”<\/p>\n

The List of the Most Important Factors Which Lenders Look at<\/h3>\n

“][vc_tta_section title=”Payment History” tab_id=”1648230711232-9b382f9d-f9fd”][vc_column_text]One of the most significant loan factors that can impact your credit is making payments on-time. Late payments can penalize you and lower your score, particularly if you make a habit of doing it. Overall, if you can prove that you\u2019re always on time with repayment plans, your credit will be relatively stable.<\/p>\n

As you can imagine, this is one of the primary reasons why a credit builder loan helps boost your rating. By making payments on these loans regularly and on time, the bureaus will see that you are more reliable.[\/vc_column_text][\/vc_tta_section][vc_tta_section title=”Available Credit vs. Debt” tab_id=”1648230711234-738a1c4b-113f”][vc_column_text]Let\u2019s say that you have $10,000 available in various credit cards or lines of credit. If you\u2019ve used up 90% of that money, then you will be seen as high risk. On the other hand, if you\u2019ve only used 10% of your available credit, your rating will be better because it shows that you can manage your credit more efficiently.[\/vc_column_text][\/vc_tta_section][vc_tta_section title=”Number of Accounts” tab_id=”1648230718976-ee0fb583-33e5″][vc_column_text]Every time you open a new credit card, get a car loan or borrow money from a lender, that\u2019s a new account on your credit history. The bureaus don\u2019t like it when you open a bunch of new accounts in a short period, as it can signify that you\u2019re not able to manage credit well.<\/p>\n

Overall, you want to minimize the number of new accounts, as well as the total amount. So, if you have five credit cards, closing one of them can help improve your score slightly.<\/p>\n

The other thing that the bureaus pay attention to is the duration of an account. The longer an account is active without any problems (such as late payments), the stronger it will appear on your credit.[\/vc_column_text][\/vc_tta_section][\/vc_tta_accordion][\/vc_column][\/vc_row][vc_row][vc_column][vc_column_text]As you can see, getting a credit builder loan can help in a variety of ways. However, the most significant method is that it will showcase a history of making payments on time. The best way to ensure that you get the most out of your credit builder loan is to set up automatic minimum payments<\/strong> so that you never miss one. Then, if you can add more during the month, you can pay it down faster.[\/vc_column_text][\/vc_column][\/vc_row][vc_row][vc_column css=”.vc_custom_1648237302277{margin-top: -0.7em !important;margin-bottom: -1.2em !important;}”][vc_column_text]<\/p>\n

Pros of Credit Builder Loans<\/strong><\/h2>\n

In case you still needed a reason to get one of these loans, let\u2019s outline the various benefits that they offer.<\/p>\n