When you get denied for bank loans, credit cards and other financial products, it’s time to look for ways to rebuild credit. If your credit score is holding you back, consider a credit-builder loan. There are several options for credit-builder loans, some with no upfront money needed.
Credit-builder loans are small installment loans ranging from $300 to $3,000. Installment loans have a fixed payment for a fixed period of time. The repayment terms can be from 6 months to 36 months. Interest rates may be slightly higher than good-credit loans but the cost can be worth it for a boost in FICO scores.
As you begin to make payments on-time and show that you are responsible with the debt, your scores will increase.
Installment loans can help add to your FICO score in two very important ways: (1) Installment loans create a good credit mix–Credit mix determines 10% of a consumer’s FICO score; and (2) Consumers with the strongest FICO credit scores tend to have a mix of different types of accounts. Credit scoring models reward people that can handle all different types of financing.
If your credit profile is missing installment credit types, consider a credit-builder loan. The purpose of credit-builder loans are to build or rebuild credit and improve credit scores.
How Credit-Builder Loans Work
Credit-builder loans are available even if you have no credit or bad credit. There are a few things you should know before you add a credit-builder loan to your credit profile:
- Credit-builder loans are very similar to a secured credit card in that collateral is required.
- Borrowers must put an amount of money into a savings account at a bank or credit union.
- Fixed monthly payments are required until the loan is paid back.
- Payment history is reported to the credit bureaus.
- On-time payments are necessary to help build or rebuild credit.
- This is a real loan, even though it is secured. That means LATE payments will be reported to the credit bureaus as well.
- Once the loan is paid in full, you have access to the money again.
- Typically, a very, very small amount of interest will be earned on the deposited collateral.
Where to get Credit-Builder Loans
Banks and credit unions typically offer credit-builder loans but you’ll need to have the collateral up-front to establish the credit-builder loan. But if you don’t have the up-front money consider Self Lender. Self Lender gives borrowers a chance to build or rebuild credit without requiring up-front cash. Even though you don’t need up-front money to get the loan, you’ll need sufficient income to afford the monthly payments.
What is a Self Lender Credit-Builder Loan – No Upfront Money Needed
Self Lender partners with Austin Capital Bank SSB, a FDIC insured financial institution based in Austin, Texas to offer borrowers a credit-builder loan without the need for up-front money. Once you’re approved by Self Lender, the loan amount is deposited in a certificate of deposit with the Austin Capital Bank. Monthly payments are required for 12 months, then you’ll get access to the money.
Self Lender offers 12-month term loans in 3 different amounts:
- Loan amount of $545 — with monthly payments of $48
- Loan amount of $1000 – with monthly payments of $89
- Loan amount of $2200 — with monthly payments of $194
There is a $15 administrative fee for the $545 loan amount and a $12 administrative fee for the $1000 and $2200 loan amounts. You’ll earn a tiny amount of interest (0.10% APY) on the CD account over 12 months. The goal here is to improve credit scores; and, the credit-builder loan, if paid on time, every time, will achieve that goal. But, since you you’ll have a nice savings amount, consider opening a high-yield CD to maintain your nest egg.
There is no “hard pull” on your credit reports to get approved for a Self Lender loan. If you are denied, it was not due to your credit history. Self Lender’s bank partner, Austin Capital Bank, uses ChexSystems to determine creditworthiness. You can’t have had a negative ChexSystems report, such as bounced checks or unpaid fees, in the previous 180 days.
Even though Self Lender pulls your ChexSystems report, a traditional banking relationship is not necessary to qualify for a Self Lender Credit-Builder Loan. You’ll need either a bank account, debit card, or a prepaid card.
You may be wondering what is ChexSystems; it’s a nationwide specialty consumer reporting agency that collects and maintains information on consumers’ closed checking and savings accounts. If you would like to learn order your ChexSystems report to get a full disclosure; it’s free. If you’re looking for a bank that does not use ChexSystems, you can open a new account and get back into traditional banking.
The credit-builder loan reports to the three major credit bureaus: Experian, Equifax and Transunion and will appear on your credit reports as a “secured-installment loan.” If you decide to close your account before it’s paid off, you can access the money in the CD, minus the amount you still owe. It takes about 5 minutes to sign-up at Self Lender.
How Credit Union Credit-Builder Loans Work
Credit-builder loans are typically offered by a Credit Union or Community Bank. But they are not always easy to find.
Your local credit union may be able to help you rebuild credit with a Credit-Builder Loan. You’ll have to meet the credit union’s criteria such as living in a certain geographic area or having been a member for a certain amount of time.
The credit union grants a loan for a certain amount — let’s say $3,000. No up-front money would be necessary. But the credit union would not actually give you the money. The money would be frozen in an interest-bearing savings account in your name.
You would then make the payments; with interest, until the $3,000 loan is paid off. At the time of payoff you would then get the money, along with whatever dividends have been earned on the savings deposit. Borrowers have an excellent chance to build a positive credit history if payments are made on time.
Other credit unions may offer credit builder loans in which the borrower puts an amount of money upfront; perhaps $300 or so, and the credit union deposits the money into an interest-bearing savings account as collateral. The credit union would then provide a line of credit up to the amount the borrower placed upfront and the borrower makes monthly payments.
Community Trust Credit Union in Oakland, CA offers a credit builder loan called the “Fresh Start” loan program. The loan is secured with a deposit ranging from $500 to $3000. The terms of the loan can be either 12 months or 24 months. The funds are placed on hold in a savings account and the borrower’s monthly loan payment activity is reported to the credit bureaus. Community Trust Credit Union is one example of how a credit builder loan works.
How FICO Scores Improve
As you repay on time, you establish a positive payment history which is reported to the credit bureaus. Not only does your credit history improve but your FICO score also improves. As long as you pay on-time and keep credit card account balances to no more than 30% of the available credit limit, you will get a boost in scores.
Personal loans are considered installment loans. Having a good mix of credit helps your FICO scores. Ideally a consumer credit report should consist of both revolving accounts (bank credit cards, retail store and gas cards alike) and installment accounts (personal, auto, mortgage and even student loans).
Credit mix accounts for 10% of your credit score. Credit mix enters the scoring formula because of how the different financial management behaviors required for each can impact the ability to pay on time.
It may be easy for a consumer to pay a credit card on-time but throw in an installment loan, with fixed monthly payments, that consumer may have difficulty keeping up. The credit scoring formula likes to see some experience successfully managing both revolving and installment types of credit.
Why would a consumer pay for a loan they cannot immediately use? The quick answer is that your credit score will improve. But you also get the added benefit of putting money away because once the loan is paid in full — you get access to the money plus whatever savings interest rate the credit union pays. There is little risk to the bank because they did not provide the actual money upfront to the borrower. Think of a credit builder loan as the old-fashioned layaway.
How to find a Credit-Builder Loan at a Credit Union
According to Steven Rick, a senior economist at the Credit Union National Association, nearly 15% of the 7,400 credit unions in the United States offer a credit builder program.
You will have to call a credit union to find out if they offer credit builder loans. You can find out if you are eligible to join a credit union through http://www.asmarterchoice.org/ website. Other financial institutions that may offer credit builder loans is a community bank or certified community development financial institution. These types of banks typically cater to low-to-moderate income households.
In case you cannot find a credit builder loan or a credit union you are eligible to join, a secured credit card can also help rebuild credit. The concept is similar in that you put money upfront in a savings account as collateral; however, with a secured credit card, you are eligible to use the credit line established by your savings deposit collateral.
The available credit line of the secured card is equivalent to the savings account deposit. With either a credit builder loan or a secured credit card make sure the bank reports payments to at least 2 of the major credit bureaus. The purpose of such credit rebuilding products is to improve your credit score; that can only be done if the payment history is reported to the credit bureaus.
As a last option if you are unable to find a credit builder loan at a credit union or put the money on deposit for a secured credit card; there are online bad credit loans but expect to pay higher interest. A high interest bad credit loan can work in your favor if you make timely payments to improve your credit score and pay it off early.
Consider building or rebuilding a positive credit history with a credit-builder loan. But keep in mind if you pay late, the loan may end up hurting your credit score. The good thing about most credit-builder loans is that you can usually stop the loan if you can no longer afford the payments.
Credit Builder Loan Overview
- The amount you borrow is deposited into a Savings Account that you cannot touch until the loan is repaid.
- You make regular on-time payments on the loan.
- As you repay on time, you establish a positive payment history that is reported to the credit bureaus.
- Based on those reports, your credit history and credit score improves over time.
- When you finish repaying the loan, you’ll have the full balance in the Savings Account, including dividends, to use as you please.
- Note that any late payments will hurt the credit you are trying to build.
Keep in mind credit mix has a larger impact on your score if don’t currently have an installment loan (personal, auto, mortgage, student). There won’t be much change to your scores if you currently have a good mix of credit.