With a credit builder loan, you make monthly payments as you do with any other loan. But the lender deposits your payments into a savings account. When the term of your loan is complete, you receive the money in the savings account minus the agreed-upon fees and interest.
A credit builder program helps improve your credit score by improving your payment history. The more on-time payments you have, the better for your score. Ideally, you want a credit report that’s filled with nothing but on-time payments.
How Does a Credit Builder Loan Help Boost Your Score?
A credit builder loan is a risk-free loan that doesn’t require a credit check. You “borrow” funds from the bank. The difference is that the funds are not given to you when you apply. Instead, you make monthly payments that go into a locked bank account after the bank’s fees and interest is assessed.
Over time, the balance builds up. After the final loan payment is made, the money matches the loan amount and is unlocked. You can spend it, keep it in the savings account, or transfer it to your bank.
Those monthly payments are reported to the three credit bureaus. As long as you make the payments on time, you get a positive payment report submitted. Over time, that can help boost your score. Don’t miss a payment as it will be reported as a missing or late payment, which can damage your score.
If you have to cancel the credit builder loan, let the bank know before your loan payment is due. Any money built up at this stage becomes yours. You should not have to pay cancellation fees for quitting the credit builder program early. You will damage your score if you simply stop paying without alerting the bank.
Credit builder products usually start with 12-month terms and increase from there. Some loans offer terms of up to 10 years. By investing more time, you have more money and more on-time payments which may help increase your credit score.
If you don’t have a credit score because you don’t have any credit cards or loans, you may start to see some slight improvement after six months of on-time payments.
Tips for Applying
Be sure to read the terms and conditions of the loan beforehand. The bank fees and interest rates on these loans may be high. It’s critical to know what costs are associated with these loans before applying.
Applying for a credit builder program is easy. You do need a checking account or acceptable debit card that can be used to make your monthly payments. You need a verifiable address. You have to have a valid mobile phone number that can be verified. Finally, you need a Social Security number or ITIN.
Fill out the online credit builder application correctly and completely. If you put in the incorrect information or forget something, your application may be denied. Prevent disappointment by filling out everything and checking it over before you submit it.