What Is A Credit Builder Loan, And When Should I Use One?
Credit cards aren’t the only way to build credit. There is another option. We’ll explain credit builder loans and when you should use one.
Having a credit history and a healthy credit score are essential components of personal finance in the U.S. If you’ve newly arrived in the U.S., a young person, or a person who has always dealt in cash, you’ll have what is termed a thin credit file. You don’t have enough credit history for the major credit bureaus to compile into a credit report and credit score.
There are several ways to start building your credit history, and one of them is a credit builder loan. We’ll explain what a credit builder loan is, when you should use one, if credit builder loans work, where you can find credit builder loans, and alternative ways to build credit.
What is a credit builder loan?
When you get a traditional personal loan, the lender gives you the money upfront, and you pay it back in monthly fixed amount payments that include interest for a set number of months until the loan is paid off.
Credit builder loans work differently. When you apply and are approved, the lender puts the loan balance you’ve chosen, typically between $300 and $1,000, into a savings account. You make fixed monthly payments over the term of the loan, usually between six and 24 months, and at the end of that term, the lender returns the total balance to you and any interest accrued if the lender offers interest.
Do credit builder loans work?
The entire purpose of a credit builder loan is to build credit. That only happens if the lender reports your monthly payments to at least one but preferably all three of the major credit bureaus, Equifax, Experian, and TransUnion, so that those payments can become part of your credit report.
Credit builder loans only work to give you a positive credit score if your monthly payments are made on time. The most significant portion of a credit score is on-time payments.
Where to find credit builder loans
Many online lenders offer credit builder loans, including SeedFi. SeedFi offers a Credit Builder Plan that lets borrowers contribute between $10 and $80 per month, and each payment is reported to all three credit bureaus.
Alternative ways to build credit
Traditional and secured credit cards can also help you build credit. It may be easier for those with little or poor credit history to qualify for a secured credit card.
Sable Card offers a combination of a debit card and a secured credit card that can help build a credit history. Sable works with immigrants who don’t have a Social Security number. Applicants can use a Visa or Passport number to apply.
Stilt Loans offers personal loans that can help build credit, but a personal loan may be harder to qualify for if you don’t have much or have a poor credit history.
Build credit with Upwardli
Upwardli was created to help immigrants to the U.S. navigate our personal finance system, and that includes building your credit history and improving your credit score. But our tools and partners can help anyone! If you need help with your credit, Upwardli is there for you.
