Is a credit builder loan right for you?

It's a smart move to take a proactive approach to building strong credit before you need a large loan like an auto or mortgage loan. When that time comes, you'll want to be in the best position to be approved. You don't want to be stuck with only the most expensive options.

Spoiler: There's nothing magic about good credit. It comes from taking small steps consistently over time.

This is where the journey gets exciting, and you get to be in the driver's seat. You're ready to start laying the groundwork, but figuring out where to start can be a little tricky. Let's look at credit builder loans and how you could use one as a stepping stone to a great credit profile.

Achieve is not a Credit Repair Organization and does not provide, or offer, services or advice to repair, modify, or improve your credit.

What is a credit builder loan?

A credit builder loan is an installment loan designed for people with low credit scores or no credit history yet. The point is to establish a positive payment history and build or improve your credit. You make payments, and the lender reports those payments to the credit bureaus.

You generally don’t get the loan funds upfront like you would with a traditional personal loan. The lender typically puts the money in a savings or CD account until you pay off the loan. Once you make your last loan payment, you receive the funds.

How credit builder loans work

Credit builder loans reverse the standard loan process. Instead of receiving loan funds upfront, you receive them at the end of the loan term. This makes credit builder loans much safer for lenders.

Most credit builder loans are small, and you repay them in fixed monthly installments over the loan's term. The lender should report your payment history to credit bureaus such as TransUnion, Equifax, and Experian. If you make your payments consistently and on time, a credit builder loan could help improve your credit profile.

How you use the loan could impact your credit:

• On-time payments reported to the three credit bureaus could help you build a positive payment history.

• A hard inquiry when you apply for the loan may cause a small, temporary dip in your credit score.

• A late or missed payment could hurt your credit.

Achieve is not a Credit Repair Organization and does not provide, or offer, services or advice to repair, modify, or improve your credit.

How to get a credit builder loan

You can look for a credit builder loan at your local credit union or community bank. You might also find one online.

Get ready before you apply by gathering certain information that the lender may ask for, including:

• Your employment history

• Proof of income (usually pay stubs)

• Information about other debts you have

• Your checking account information, to set up automatic payments (not always required but an excellent way to avoid missing any payments)

Advantages of credit builder loans

Here are the pros to consider when deciding if a credit builder loan is right for you.

High chance of being accepted

Lenders have more flexible criteria for credit builder loans, so your chances of being approved are higher. The loan has minimal risk for the lender, because they aren't giving you any money upfront.

The main focus will be on getting you a payment you can afford. The goal is to set you up for success.

Could improve your credit score

Your payment history is the most important factor in your credit score. A credit builder loan could help you build or rebuild credit, as long as you make on-time payments and the lender reports those payments to the credit bureaus.

Achieve is not a Credit Repair Organization and does not provide, or offer, services or advice to repair, modify, or improve your credit.

A way to save

Since the loan money is held by the lender until you pay it off, you are in effect saving money in monthly installments. Not being able to access the cash until the loan is paid off could help you build a nest egg or emergency fund.

Downsides to credit builder loans

No access to cash until the loan is fulfilled

Don't count on using your credit builder loan money right away. A few lenders provide gradual access to funds as you make payments. Most require you to pay back the loan in full before you can access the money.

You're paying for a credit score

Normally, a loan is a way to borrow money, and in exchange, you pay the lender interest. With a credit builder loan, you pay interest, and possibly lender fees, without being able to borrow any money.

In effect, you're paying for the opportunity to build or improve your credit score. This could be a worthwhile tradeoff if it helps your credit, but you may want to look for alternatives first that don’t require paying any interest or fees.

Results could take months

You might need to make several months of on-time payments before you notice a change to your credit standing. If you don’t have a credit score yet, you need to have an account open and reported to the credit bureaus for six months before you’ll have a FICO Score. FICO Scores are the most widely used type of credit score by lenders.

If you have other credit data in your credit file, you might notice results after anywhere from a month to a year. The time frame is different for everyone and depends largely on what you're starting with.

Pro tip: Results can be positive or negative. If you don't pay on time, your credit standing could suffer.

Is a credit builder loan right for you?

A credit builder loan could work well for you if you're new to credit or are rebuilding after a financial setback. You also need to be able to afford the monthly payment, so pick an amount that fits your budget.

A credit builder loan is less useful if you already have healthy credit or need cash right now. If your credit is already robust, you don’t need this type of loan. If you need money right away, a regular personal loan is funded upfront after your application is approved.

Other ways to build or rebuild credit

If a credit builder loan isn't a good fit, you have several other options to consider.

Apply for a loan with a co-signer

You could apply for a loan with a co-signer. As co-signers, you both have legal responsibility for repaying the loan. The lender also checks both of your credit profiles during the application process. If your co-signer has a high credit score, they could improve the likelihood of an approval.

This may be a good strategy if:

• You can't qualify for the loan you want on your own.

• Your co-signer has stronger credit than you.

• They don't mind co-signing on your loan application.

Become an authorized user

You could ask someone to add you as an authorized user on their credit account. You could then get the benefit of any positive activity on the account, if the creditor reports the account on your credit file.

Positive activity includes on-time payments and the account’s credit utilization (the balance on the account divided by the credit limit). If the accountholder pays on time and keeps their credit card balance low, that could improve your credit score just because you’re an authorized user on the account.

This strategy only works if the accountholder has good payment habits. If they make late payments or carry a large balance, the account could negatively impact your credit.

Kickstart new financial habits

You could build or fix your credit by improving your financial habits. Here are some good habits that could help:

• Learn how to budget and set aside enough money to cover your bills each month.

• Always pay every bill and debt on time.

• Try not to carry a balance on your credit cards. Whenever possible, pay off the statement balance by the due date. If you have to carry a balance, pay it down as soon as you can. The higher your credit card balances are, the more they could affect your credit score.

• Don't apply for new credit accounts unless you really need to.

• Get your free credit reports from AnnualCreditReport.com and check them for errors. You can get a free copy of each report once per week. If you find an error, dispute it with the credit bureau that issued the report and the creditor. Some errors could hurt your credit score, which is why it’s important to get them removed.

Achieve is not a Credit Repair Organization and does not provide, or offer, services or advice to repair, modify, or improve your credit.

Apply for a secured credit card

A secured credit card requires a refundable cash deposit upfront. The card issuer holds the deposit, and you can use the credit card like any other.

If you make purchases, you’ll get a bill to pay. If you pay on time and the card issuer reports your payments to the credit bureaus, you could build a positive payment history using your secured card. Aim to pay off your card’s balance each month by the due date to avoid interest charges.

After a period of on-time payments, the card issuer may upgrade your account to an unsecured card. In this case, you get a refund of your security deposit and can continue using the card as normal.

See if your landlord offers rent reporting

Rent payments normally don’t get reported to the credit bureaus, unless your landlord offers rent reporting. Some landlords either offer this themselves or through a third-party service, such as Zillow Rent Reporting. If your landlord offers rent reporting, you typically need to opt into the service if you want your rent payments reported.

Use a regular personal loan

A standard personal loan builds credit as well as a credit-builder loan, but it gives you the money upfront instead of waiting until you've made all the payments. If you already have financial goals you want to reach, a personal loan could help you do so, and on-time loan payments could help you build credit, too.

Achieve Personal Loans could be a good place to start. You can prequalify to see if you're eligible and check your estimated rates and terms. Prequalification with a soft inquiry won't hurt your credit.

What's next?

• Make a budget and decide how much of a payment you can afford.

• Use a free credit score website to check your credit and know where you stand before you apply.

• Talk to two or three lenders. You will likely have to pay loan fees and interest, so compare offers before you choose.

If you’re looking for a traditional personal loan where you receive the money upfront after approval, find out if you're eligible with Achieve Personal Loans today.