If you’re struggling with your credit history, a low-risk credit-building loan could be the right step to get you back on track.
A credit builder loan is specifically designed to help those with little or bad credit history build and improve their scores.
Plus, it can be a useful way to save money at the same time, experts say.
Loan terms vary between lenders, but the main thing that sets them apart is that borrowers make payments before receiving funds.
This is the opposite of other loans and means Americans can build credit and savings simultaneously.
If you’re struggling with bad credit, a credit-building loan could be the right step to get you back on track.
Credit scores range from 300 to 850. The higher the score, the better.
When a borrower opens a credit-building loan, the lender moves its own funds, usually in the range of $300 to $1,000, into an escrow account.
They will then not be able to access that money until they have repaid the loan.
The borrower then makes payments, including interest and fees, in installments over a period typically set between six and 24 months, according to the Consumer Financial Protection Bureau (CFPB).
Like a traditional loan, these payments are reported to the major credit bureaus: Equifax, Experian, and TransUnion.
If the borrower makes payments on time, this will be reflected in a better credit score.
This will make it easier for them to qualify for other types of credit, including credit cards and mortgages with lower interest rates.
Once they have paid off the loan in full, they will have access to the funds in the savings account, along with any interest earned.
Borrowers who fail to repay credit-building loans on time risk damaging their credit records, just like any other loan reported to a national consumer reporting agency, the CFPB warns.
“A credit-builder loan is a valuable tool for anyone looking to improve their credit score,” Ted Rossman, senior industry analyst at Bankrate, told DailyMail.com.
‘It’s certainly not the only thing you can do (using your parents’ credit card as an authorized user or signing up for Experian Boost are a couple of things that could pay more immediate dividends), but a credit-builder loan is a useful way to build credit and save money at the same time.
“Of course, you don’t have to limit yourself to just one tactic to build credit. It may make sense to do all of these things at the same time,” he added.
When a borrower opens a credit-building loan, the lender moves its own funds, usually in the range of $300 to $1,000, into an escrow account.
“A credit-builder loan is a valuable tool for anyone looking to improve their credit score,” Ted Rossman, senior industry analyst at Bankrate, told DailyMail.com.
For those just beginning to access credit (including the estimated 26 million American adults who are “credit invisible”), it can be a useful tool to help them obtain better financial opportunities in the future.
But a credit-building loan may not be an ideal solution for everyone, Rossman noted.
He noted that loans are most beneficial to those who do not have existing debts.
According to the CFPB studyThose with no existing debt saw their credit scores increase by 60 points more with the loan than participants with existing debt.
According to the latest study by the analytics company FICOThe average credit score in the US is 717.
The FICO model considers any score above 601 to be “fair” and any score above 670 to be “good.”
Some credit-building loans also come with high fees or interest rates, which can reduce the amount you ultimately save. Life Hacker reported.
Americans considering this type of loan should consider whether it is right for them and pay attention to the fine print.