Thinking About A Credit Builder Loan? [Read This First]

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Are you struggling with poor credit? If so, you may have been approached by companies offering credit builder loans as a payday loan alternative. With the promise of improving your credit score at a record pace, it’s time to see if they really do work, and if so, how quickly.

This post will cover all the different aspects of a credit builder loan, the pros and cons, and my opinion on the best way to repair or build your credit.

What Type Of Loan Helps Build Credit?

Loans, in general, can help you build credit if you make your payments on time. If you need to establish credit or improve your credit rating, people who have no credit may apply for unsecured loans, secure loans, or credit builder loans to help them create their credit.

Credit is commonly associated with a person’s credit score, which attempts to define a person’s creditworthiness based on their past ability to repay loans promptly.

Secured Credit Cards

Individuals with no credit rating may find it challenging to initially get a loan or a credit card that does not require a cosigner. Adults can get a secured credit card, which will allow them to build credit based on the money they have as backup in a savings account.

With a secured credit card, after funding a savings account attached to the card, you may charge the credit card from a secured account into an unsecured loan. Essentially, you are “borrowing” your own money under the premise of building credit through a third party.

What Is A Credit Builder Program?

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Credit builder programs claim to help borrowers re-establish their credit as a payday loan alternative. Many organizations such as banks, nonprofit organizations, and federal credit unions offer these programs to consumers.

How A Credit Builder Loan Works

A credit builder loan is a loan that allows an individual to establish or re-establish their credit. Individuals who may have experienced some financial setback can use a credit builder loan to improve their credit rating if they’re willing to pay interest and fees. People who do not have a credit history may also use a credit builder loan to establish their positive payment history.

The loans individuals can take out to begin a credit builder program include small loans of up to $1,000. These loans are usually required to be repaid within two years.

Secured Loans

Credit builder loans come in many different shapes and sizes, but the most common option is a secured loan, which is backed by collateral. The collateral in a bank credit builder program would consist of having a loan that’s backed by a security deposit held in a savings account on behalf of the individual.

A credit builder loan holds the amount of money an individual borrows in an account while the borrower repays the loan. After the loan is paid in full, a borrower receives their money back in cash. In essence, you are borrowing your own money to build credit.

Unsecured Loans

Credit-builder programs also utilize unsecured loans. This type of loan consists of a person paying back the money they borrow each month at a specific interest rate. An unsecured credit builder loan is best for someone who needs to have cash flow every month and cannot wait to access savings later.

After a few months, lenders report this loan to the credit bureaus, which helps to raise credit scores.

Self (Formerly Self Lender)

Self is a program that charges fees for the service. The company charges a non-refundable $15 fee to assist people with improving or establishing a credit history.

This account is a credit-builder account that puts money aside into a certificate of deposit. After the loan is repaid, a borrower receives the funds initially placed in the certificate of deposit. Self requires the borrower to pay all the account fees before they received the balance from the CD.

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How Fast Can I Build Credit?

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Experian, one of the major three consumer credit reporting agencies, reported it takes up to six months for individuals to have a credit file established or significantly altered.

7 Fast Ways To Build Credit

There are several ways to “quickly” build or improve your credit. Quickly is a relative term because this is not going to happen overnight. However, some of the techniques involve the following:

1. Become an authorized user on a friend or family member’s account

As you can imagine, there are many ways this plan can end badly, including financial ruin for all account holders, as well as personal relationship issues. This is not the best way to improve credit if you previously have had repayment problems.

2. Make multiple payments each month on your current credit cards

When individuals make more than one payment throughout the month on an account, this allows individuals to lower the amount of outstanding unpaid credit. Knocking down the outstanding debt you have will help your credit score improve.

As stated by the reporting agencies, credit utilization makes up 30% of an individual’s overall credit score. The more credit an individual has available, but is not using, the better their score will be as long as they remain current on payments.

3. Ask lenders to increase credit limits on credit cards

If you have a plan to get out of debt and hold yourself accountable with your debt payoff, this may be an option. If you continue to struggle with your finances, this strategy can quickly backfire.

By getting a higher credit limit, individuals can improve their credit score as long as they don’t use the additional credit provided. This shows lenders that the borrower can demonstrate discipline with their available credit.

4. Resolve any errors on your credit reports

It’s required that each credit reporting agency offer a free credit report every 12 months to borrowers. You can access your reports for free at Annual Credit Report.com. These reports will not provide you with a free credit score but rather your overall payment history.

By accessing your credit report every year, you can clean up any errors on each report as well as identify any potential identity theft issues. The three major credit bureaus are Equifax, Experian, and TransUnion, and all three credit bureaus statements should be reviewed annually.

5. Ask creditors to remove old items from credit reports

If items on the credit scores of the three credit reporting agencies are older than the required time limits, you can ask creditors to remove these items. Should an individual dispute any issues they see on their credit reports, the credit reporting agencies have 30 days to review these items and send a response to the consumer.

These are the timelines for when things should fall off your credit report automatically:

Type Of Content On Report:Time Frame To Be Removed:
Open Account: Good StandingRemain Until Account Closed
Closed Account: Good Standing10 Years
Late / Missed Payments7 Years
Accounts In Collection7 Years
Chapter 7 Bankruptcy10 Years
Chapter 13 Bankruptcy7 Years
Credit Inquiries2 Years

6. Don’t close credit card accounts

By maintaining open lines of credit, individuals can build good credit scores. If they do not use these credit cards but leave them open, it can help to raise their credit score. By closing an account, individuals reduce the amount of available credit they have access to, which no longer shows if they are responsible with credit.

Rather than closing out a credit card account, to maintain a high credit rating, you can make purchases periodically with the credit card and pay off the balance each month.

7. Pay loans on time

Paying bills on time will help you raise your credit score. On-time payments have more impact to build good credit than many of the other factors. Those who pay their bills on time usually qualify for the best-rated credit cards.

Making payments on time can help an individual improve their credit score at a faster rate by establishing a positive track history.

8. Add bills you are already paying to your credit report

This may include things such as rent payments and utility bills. This will improve a credit score because it is documenting things that an individual is already paying.

Services like RentTrack report rent payments to credit reporting agencies.

9. Sign up for Experian Boost.

Experian Boost is a service offered by Experian to help improve your FICO score. According to their data, the average increase using this service is 13 points. This allows a person to receive credit for their utility and phone bills they’re already paying.

How To Get A Loan With Poor Credit

If you have poor credit, the annual percentage rates you are offered are going to be much higher than average. Even a percentage point difference in an interest rate can mean the difference between tens of thousands of dollars over the life of the loan.

Loans commonly available to people with bad credit include personal loans with high-interest rates, debt consolidation loans, secured credit cards, or payday loans. These loans will have high-interest rates, which may hurt a person’s ability to afford monthly necessities such as food and shelter.

If you’re stuck with poor credit, avoid taking out a loan that you can not pay off each month. Avoid vehicle loans or other long term loans that may inhibit your ability to ever get ahead in the debt cycle.

Hard Inquiries Hurt

Each time you apply for a loan and your credit is run, a “hard inquiry” is recorded on your credit report. Unsuccessful loan attempts can take a year for those inquiries to no longer impact a credit score. However, hard inquiries remain on a credit report for two years.

Unsecured Personal Loans

Borrowers can apply for unsecured personal loans to help them establish their good credit. These loans can be up to $50,000. Individuals with imperfect credit can also apply for unsecured personal loans, which will result in a higher interest rate.

With an unsecured personal loan, the borrower receives money in a single payment and may use this same money to repay the debt. These loans have fees and a high APR, so this may be a costly way of establishing or raising a credit score.

When an individual uses a secured credit card, these loans have interest rates that are much higher than an unsecured credit card. Interest rates, depending on your credit score, may reach 25%!

One of the benefits of having a secured credit card is it is a simple way to restore credit or establish credit – if you can pay off the balance in full each month. After making payments on time, borrowers have a better chance of being approved for a traditional credit card from the lender.

Debt Consolidation

Borrowers may get a debt consolidation loan to combine their credit payments into one payment.

In some circumstances, a debt consolidation loan can help relieve the stress related to debt. At times, by consolidating debt into one payment, borrowers can gain control of their finances.

However, just because a debt consolidation may result in lower monthly payments, you should avoid taking on any new debt after the consolidation.

Because of the amount of credit card debt in the United States, debt consolidation is a common option people explore to lower their monthly payment amounts. If an individual finds they are having problems making on-time payments, then it may be essential to consider debt consolidation or generating more income.

I wrote a detailed article about debt consolidation here if you need more information. Debt consolidation is not always a wise choice because it will add more time to your debt repayment plan, and you could end up paying more in fees than you should.

Installment Loans

Installment loans are traditional loans most consumers are familiar with. These are loans such as vehicle loans, mortgages, and personal loans.

An installment loan has a specific annual percentage rate throughout the contract unless you acquire a lease with an adjustable-rate.

How Can I Get Emergency Money Fast?

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There are various ways you can scrape up extra money if you’re in a bind. If you’re desperate, think outside of the box for ways to make money or lower debt. Here are a few ideas to create additional income quickly:

  • Rent a room in your home
  • Get a roommate
  • If you can, work extra hours at work
  • Ask friends or family members for help
  • Sell items you no longer need on Mercari
  • Recycle aluminum cans
  • Open a new bank account with a signup cash bonus
  • Sign-up for multiple mystery shopping companies
  • Negotiate lower interest on your high-interest loans
  • Become a rideshare driver for Uber or Lyft

What App Gives Instant Loans?

There are various apps individuals can use to borrow money as a payday loan alternative. The following list of apps can help individuals find loans that may provide them with cash they need to pay their expenses.

MoneyLion

MoneyLion gives individuals a membership that provides similar services banks offer, with fewer headaches. Members have C Rewards benefits and checking accounts with no fees. The company also offers members investment options.

This service has a credit builder loan with a 5.9% APR. It provides individuals with $500 for the credit building loan to assist individuals who have low credit scores. Borrowers can get a payday loan of $250 before their payday. When individuals receive paychecks in advance, the service cost $29 each month if they have a PLUS account.

The service also has a free account that allows individuals to get a cash advance. If an account holder logs into the app each day, they can receive $1 added to their investment account, which makes up for the fee of the PLUS account service.

Dave

Dave allows individuals to get the money they need before payday. This payday loan alternative app is focused on helping people budget their money more efficiently. It tells you if you have bills due soon by sending you a push notification. With these notifications, users can avoid overdrawing their accounts if they are spending too much early on in the month.

A Dave account allows individuals to get an advance of $75 at 0% interest without a credit check. The app will put the borrowed money into a bank account and withdraw it on your payday.

The Cost?

There is a $1 a month fee for membership. The service may be worth it if you struggle with overdraft fees or are tempted to get a high-interest payday loan.

Rainy Day Lending

This is an app that connects borrowers to personal loan lenders. The app itself does not provide loans. If approved, you can receive money in your account as soon as the next business day.

LoanSolo

LoanSolo connects borrowers to lenders on their app, similar to Rainy Day Lending. Once approved, lenders make direct deposits into your account for the agreed-upon amount. The maximum amount an individual can receive for a personal loan is $3,000. A borrower can receive a maximum loan amount of $1,000 for a payday advance.

PockBox

PockBox is a payday loan alternative app that allows individuals to borrow a maximum loan amount of $2,500 from lenders. This service enables people to access lenders that direct deposit money in their account. These loans have annual percentage rates that are lower than what a payday loan company would charge.

Earnin

Earnin gives an individual early access to their paycheck. The borrower logs in to the app while they are at work, and the app tracks their work hours for them. After the borrower receives their “paycheck” from Earnin, the Earnin app would deduct the money that it advanced them.

Earnin makes money by “tips” given by borrowers. There is no interest paid on the loan.

Daily Pay

Daily pay is an app that works with employers. If an employee wants to receive money from their paycheck, they do this by taking money out of the balance their employer placed in their account for the hours they worked.

This allows access to money throughout the month rather than waiting to receive a paycheck at the end of the month from their employer. This can help people with unexpected expenses that arise during the month.

PayActiv

This service allows individuals to receive payday advances as well as pay bills through PayActiv. To access your money before payday, PayActiv charges a $5 fee.

FlexWage

Employees can access their paychecks in advance using FlexWage. This app gives individuals a debit card that is connected to their FlexWage account. For people who do not have a bank account, this gives them the ability to have their checks sent to FlexWage with direct deposit.

To access the FlexWage account, customers are charged $5. While not the ideal way to handle money, it’s cheaper than using a payday loan company for an advance on income.

The Pros Of A Credit Builder Loan

If utilized correctly, a credit builder loan can help people improve their credit ratings within 3 to 6 months, and for the price, they may be a reasonable payday loan alternative. The time it takes to grow a credit rating also depends on if an individual is improving their credit or if they are establishing credit from scratch.

Keep in mind, it is easier to move the needle up if you have no credit than it is to fix previous credit issues that resulted in a lower score.

A benefit of a credit builder loan is the savings account option. If you struggle with saving money, credit builder loans that require you to put up collateral can help you learn to save money. In theory, this can help you with establishing good money management habits.

When individuals make payments on time, it helps them develop good money habits that show financial responsibility. This will allow them to apply for more substantial loans in the future.

The Cons Of A Credit Builder Loan

Credit builder loans have higher interest rates than traditional loans and can contribute to a downward debt spiral. Also, most credit builder programs charge a substantial amount of money to enroll. While interest rates are higher, there are also administration fees.

How Do I Get A Credit Builder Loan?

Borrowers can find credit builder loans at small banks such as community banks. If an individual has a bank account, they can ask their bank if they offer this service or review information from other banks to determine if they have credit builder options available.

If you bank with a federal credit union, keep in mind that only about 15% of credit unions offer a credit builder program. Individuals must review the website information provided by the credit union to determine if credit unions in your area offer this service. Traditional large banks usually have these services.

Credit Builder Loans – My Opinion

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This post gave you a detailed look into the credit builder loan process. However, I would not advise anyone to actually use a credit builder loan. In a similar vein to debt consolidation, there are ways for you to improve your credit score without giving away more of your hard-earned money.

To improve your credit, focus on the credit cards and other debts you currently have and do everything you can to make your loan payments on time. Staying current on your payments will improve your credit score over time and is just about as efficient as any of these credit builder programs that will charge you high-interest rates and fees to enroll.

Avoid the gimmicks and get your financial house in order right where you are. There are no quick fixes and improving your credit takes time. While I have not used it, Experian Boost seems like a decent option because it is free, and the average boost is 13 points. That’s the only program in this list I would recommend looking further into.

If you need help with debt and credit, check out my posts about how to create a monthly budget and a simple plan to pay off debt. Train yourself to make financial decisions based on plans rather than emotion.

Don’t become trapped in spending more money under the guise of improving your credit. Create a budget and a plan to take control of your finances. You got this!

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About The Author

Ryan Luke

Ryan Luke is a father of three, a husband, a financial coach, and a full-time police officer. He has been featured on MarketWatch, Forbes, Fox Business, Experian, MSN, and USA Today. He focuses on providing easy to understand personal finance information to first responders so they can get out of debt and build wealth on a public servant salary.

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