If you are struggling with bad credit, a low-risk credit builder loan may be the right step to get you back on track.
A credit builder loan is specifically designed to help people with poor credit history build and improve their score.
Plus, it can be a useful way to save money, experts say.
Loan terms vary by lender, but the main difference is that borrowers make payments before receiving the money.
This is the opposite of other loans: it allows Americans to build credit and savings at the same time.
If you are struggling with bad credit, a credit builder loan may 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 builder loan, the lender deposits its own money, typically between $300 and $1,000, into an escrow account.
They cannot access this money until the loan has been paid off.
According to the Consumer Financial Protection Bureau (CFPB), the borrower then repays the loan, including any interest and fees, in installments over a period typically set at six to 24 months.
Just like a traditional loan, these payments are reported to the major credit bureaus: Equifax, Experian and TransUnion.
If the borrower pays on time, this will be reflected in a better credit score.
This makes it easier for them to qualify for other types of credit, such as credit cards and mortgages with lower interest rates.
Once they have paid off the loan in full, they will have access to the money in the savings account, plus any interest earned.
Borrowers who fail to repay their credit builder loans on time risk having their credit damaged, just as they would with any other loan reported to a national credit 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. For example, you can apply for a parent’s credit card as an authorized user or sign up for Experian Boost. These are a few things that can yield more immediate results. But a credit builder loan is a useful way to build credit and save money at the same time.
“Of course, you’re not limited to one tactic to build credit. It can make sense to do all of these things at once,” he added.
When a borrower opens a credit builder loan, the lender moves its own money, typically between $300 and $1,000, into a blocked escrow account
“A credit builder loan is a valuable tool in the toolbox for anyone looking to improve their credit score,” Ted Rossman, senior industry analyst at Bankrate, told DailyMail.com
For people new to credit — including the estimated 26 million adults in the U.S. who are “credit invisible” — it can be a useful tool for better financial opportunities in the future.
But a credit builder loan may not be the ideal solution for everyone, Rossman points out.
He noted that the loans are more beneficial for people without existing debts.
According to a CFPB studyParticipants without existing debt saw their credit score increase 60 points more as a result of the loan than participants with existing debt.
According to the latest research from analytics firm FICOthe average credit score in the US is 717.
According to the FICO model, any score above 601 is “fair” and any score above 670 is “good.”
Some credit builder loans also come with fees or high interest rates, which can reduce the amount you ultimately save. Lifehacker reported.
Americans considering the possibility of such a loan should consider whether it is the right choice for them and pay attention to the fine print.