Credit Builder Loans
What are credit builder loans?
Credit builder loans are typically for small amounts of $1,000 or less. They usually have a repayment term of six to 24 months, so it’s a short-term loan borrowers primarily use to boost credit. Payments are as small as $2 per month. Every payment you make is reported to the credit bureaus. At the end of the loan term, you get the money back (less a fee), or the money can be rolled into another product such as a secured credit card.
Why are they important?
The idea is that you can show off your ability to make regular, on-time payments over a period of time. That’s important because payment history typically accounts for 35% of your credit scores. In the end, you not only improve your credit history but also save money you might not have otherwise. Once you increase your scores, you can start qualifying for other forms of credit, such as personal loans or credit cards, which can further improve your credit.
How to manage a credit builder loan:
- Pick the right type of credit-builder loan. Look for one with a payment you can comfortably afford. Stretching your budget will only raise your risk of missing a payment and damaging your score. Choose a manageable loan amount and a term no longer than 24 months. Choose a loan that reports payments to all three major credit bureaus.
- Make payments on time. If you pay the loan as agreed, you build up good data on your credit reports. But a payment more than 30 days late will also go on your reports and can seriously hurt your score.
- Monitor your credit score. Credit Repair Express updates your score weekly, so watch the overall trend of your score, but don’t obsess over tiny movements.
- Decide what to do with your loan proceeds, plus any interest. At the end of the loan term, you get the money — and likely a better credit score. If possible, use that money as an emergency fund. Having even a few hundred dollars saved can insulate you from unexpected expenses that otherwise might lead to debt or missed payments and score damage.
Can I pay my credit builder loan off early?
Even though most lenders will allow you to pay off the credit-builder loan ahead of schedule, doing so defeats the purpose of taking out the loan in the first place. Paying off a credit-builder loan early can limit its positive impact on your credit scores, but it doesn’t have any negative credit impacts. By repaying the loan early, you cut short the positive payment history, which is what you’re trying to achieve to help build credit.
Recommended Providers
Self.inc offers several different products including credit builder loans and secured credit cards.
Kikoff offers different products so you can find just the right one for your financial needs.