If you’ve had a little bit of bad luck in the credit department, or just haven’t yet built a credit history, you might be looking for ways to establish yourself or bring your score back to life. And one of the very best ways to do this is with a credit builder account.
What is a Credit Builder Account?
You may have never heard of a credit builder account or loan. Since they are usually offered by small financial institutions like credit unions, they aren’t widely advertised. But don’t let the lack of fanfare fool you.
Since credit builder accounts are some of the lowest risk, lowest interest credit building options available, they can be a great choice for people in all kinds of credit situations.
Credit builder accounts are loans that you apply for just like any other, but they don’t do a hard credit check and almost everyone is approved. Once approved, they deposit the money you borrow into a savings account that you can withdraw once you have made all the payments — usually after a year.
Where Can I Get a Credit Builder Loan?
Credit builder loans are usually made by small financial institutions like credit unions. In fact, about 1 in 5 credit unions offer this type of loan. Some banks and nonprofit organizations also offer this type of service. You can find a partial directory of these institutions on the Consumer Action website.
How Does a Credit Builder Account Build Your Credit?
The financial institution reports your payments to the credit bureau just like any other lender, so if you pay on time, you could raise your credit rating by quite a bit. In fact, one study showed an average improvement of about 35 points in six months. That may not sound like a lot, but 35 points is no easy feat without a little help. Also, since they usually don’t perform a hard credit check to determine approval, you won’t get a credit inquiry ding on your report.
How Much Can I Borrow With a Credit Builder Account?
Usually these are small loans of no more than $1,000, but the range varies a little with each institution. But that’s not all. Most lending institutions also give you free access to some type of credit monitoring service so that you can stay on top of your improvements.
How Do I Know if a Credit Builder Account is Right for Me?
Even though a credit builder loan is a pretty low-risk venture, there are still some things to consider before you decide if it’s right for you. For example, if you are currently having trouble paying your other bills on time, this might not be the right time for a loan that requires installments. Just like with other creditors, they will report slow or missed payments just like they report on-time payments.
You should also check the loan terms. Most credit unions offer pretty modest interest rates, but it’s important to check that up front. Take for example, 1st Financial Federal Credit Union. Their terms include:
- Minimum Loan Amount: $500
- Maximum Loan Amount: $1,000
- Loan Term: 12 months
- Interest Rate: 12%
- Payment history reported to credit bureaus
- 50% of interest refunded back with on-time payments
You will notice that while their interest rate may seem a little high, half of that will be refunded to you as long as you make on-time payments. Take the time to shop around with different lenders in your area and look for the friendliest terms.
Credit Builder Accounts vs. Secured Credit Cards
Many people opt for secured cards over credit rebuilder loans for the simple fact that you can get your money up front rather than waiting until the end of the loan term. But there are some things to think about with that.
For one thing, a secured credit card usually comes with much higher fees than a credit rebuilder loan. In fact, some companies charge high annual fees on top of high interest rates. So, even though these cards might be great for some people, weigh your options and consider either taking out a credit rebuilder loan instead, or use the two in conjunction to prove responsible habits. Just make sure you can afford any payments you commit to.
Another thing to consider is that some secured credit card companies do not report good behavior to the bureaus — only missed and late payments. But all credit rebuilder lenders report good behavior. Again, check the conditions and choose wisely.
Conclusion
Credit builder loans are a great options for anyone looking to raise or establish their credit score with very little risk. But like with any other financial product, be sure to ask for all the information and disclosures before you apply. If you borrow wisely, it could be the best financial decision you ever make.