How To Apply For A Credit Builder Loan To Improve Your Credit Score

Getting approved for loans or credit cards can be very difficult if you have bad credit or no credit history. Many lenders view applicants with poor credit as high-risk and are hesitant to approve them. One way to build your credit from scratch or improve a low score is by taking out a credit builder loan. In this comprehensive guide, I’ll explain what credit builder loans are, their benefits, eligibility requirements, and walk you through the step-by-step process of how to apply for one.

What Is A Credit Builder Loan?

A credit builder loan is a unique type of installment loan specifically designed to help consumers establish or rebuild their credit.

Here’s how it works:

• You apply for a set loan amount, usually between $300 to $1000 The lender approves you for the loan

• Instead of giving you the loan amount upfront like a regular personal loan the lender places the funds into a locked savings account.

• You make monthly payments on the loan over a set period of time, usually 12-24 months. The lender reports these on-time payments to the major credit bureaus.

• After you pay off the loan the lender releases the loan amount that was deposited into the savings account to you. Plus you now have an improved credit history thanks to the positive payment information added to your credit reports.

The main advantage of credit builder loans is you aren’t tempted to spend the loan funds since you don’t have access to the money until the loan is fully paid off. The regular payments and reporting to the credit bureaus helps establish or rebuild your credit.

Benefits Of Credit Builder Loans

Here are some of the biggest benefits of using a credit builder loan:

• Requires little to no credit check: Most lenders only do a soft credit inquiry when you apply which doesn’t impact your scores. Some do no credit check at all. This makes it easy to get approved even with poor credit.

• Builds credit history: The on-time monthly payments are reported to Equifax, Experian, and TransUnion. This builds up your payment history, which is the biggest factor in your scores.

• Improves credit mix: Credit builder loans add an installment loan to your credit mix, which diversifies your credit profiles. This can boost scores.

• Establishes credit if none: If you have no credit history, this is an easy way to establish a FICO score and credit file.

• Access to funds at the end: Once paid off, you get access to the loan amount that was set aside in the savings account. So you build savings while improving your credit.

• Interest rates are low: Credit builder loans charge reasonable interest rates since they are low risk for the lender. Rates often range from 7% to 15%.

Credit Builder Loan Eligibility Requirements

The eligibility requirements for credit builder loans are fairly minimal compared to standard personal loans. Here are some common requirements:

• Identity verification: You’ll need to provide your SSN, date of birth, and contact information so the lender can verify your identity.

• Income: Lenders may require you to provide evidence of income, such as pay stubs or tax returns to determine if you can manage the monthly payments.

• Age: You typically need to be 18+ years old. Some lenders require you to be of legal age in your state, which may be 19+ or 21+ in some cases.

• Bank account information: You’ll need to provide your checking account details so the lender can pull your monthly payments automatically.

• Fees: Most lenders charge an origination fee and/or application fee between $10 to $100.

As long as you have stable income and can verify your identity, you should qualify even with bad credit or no credit history at all.

How To Apply For A Credit Builder Loan In 8 Steps

If you’ve decided a credit builder loan is right for your situation, here is a step-by-step guide on how to apply for one:

1. Compare credit builder loans

Not all credit builder loans are created equal. Compare interest rates, loan amounts, fees, and terms across multiple lenders. Some top lenders include Self, Credit Strong, MoneyLion, and Credit Karma. Pick the loan that best fits your budget and needs.

2. Gather required documents

You’ll need to provide proof of identity and income. Have your SSN, tax returns, pay stubs, bank statements, and a government-issued ID ready. Double check you meet age and any other requirements.

3. Apply online

Most credit builder loan applications are quick and easy online forms. Enter your personal details, income, employment information, and bank account numbers. The process takes 10-15 minutes.

4. Authorize a soft credit check

The lender will do a soft inquiry on your credit report to verify your identity and determine if you meet eligibility criteria. This won’t impact your credit scores. Some lenders do no hard or soft pull.

5. Accept loan terms

Carefully review the loan agreement detailing the loan amount, APR, monthly payment, origination fee, loan term, and other terms and disclosures before signing. Make sure you understand and agree to all terms.

6. Pay any upfront fees

Most lenders will charge an origination fee between $10 to $100. This one-time fee is often deducted from the loan amount. For example, if you get approved for a $1,000 loan, the lender may deduct a $50 origination fee so you receive $950 when the loan completes.

7. Set up automatic payments

You’ll need to set up automatic monthly payments from your bank account on the due date. This ensures on-time payments which are critical for credit building. Many lenders allow you to select your payment due date that aligns with your pay schedule.

8. Make consistent on-time payments

Be sure to make all your monthly payments on time for the duration of the loan term. Set payment reminders if needed. This consistent on-time payment history will boost your credit scores as long as the lender reports your positive payment activity to the credit bureaus.

Once you pay off the loan after 12-24 months, the funds are released to your bank account. Check your credit reports to verify the loan was added to your credit history. With responsible use of a credit builder loan, you can establish credit for the first time or significantly improve poor credit scores.

Finding The Right Lender For You

With so many credit builder loan lenders available, it’s important to find the right one for your situation. Here are a few factors to consider when comparing your options:

• Interest rates and fees – Look for the lowest rates and transparent fees. Rates from 7-15% are common.

• Loan amounts – Ensure the lender offers a loan amount that matches your credit building needs. $500 to $1000 is standard.

• Credit reporting – Confirm the lender reports payments to all three credit bureaus for maximum impact.

• Loan term flexibility – Opt for terms between 12-24 months so you can choose an affordable monthly payment.

• Funds accessibility – Make sure you’ll have access to the loan amount after successfully repaying it.

• Customer service – Seek lenders with strong customer service in case any issues arise.

Taking the time to find the right loan for your needs will ensure the process goes smoothly as you establish or rebuild your credit history.

Pros And Cons Of Credit Builder Loans

Like any financial product, credit builder loans come with both advantages and potential drawbacks. Consider these pros and cons when deciding if this option is right for you:

Pros

• Help build credit history from scratch
• Can improve poor credit scores
• Easy approval requirements
• On-time payments reported to credit bureaus
• Access to funds when loan completed
• Lower interest rates than payday or title loans

Cons

• Monthly payments required for 1-2 years
• Origination and admin fees
• Loan amount unavailable until loan paid off
• Not ideal for large credit needs or high balances
• Interest paid doesn’t build savings

For many people with no credit or very poor scores, the pros often outweigh the cons of using a credit builder loan responsibly.

Alternatives To Credit Builder Loans

If you decide a credit builder loan isn’t the optimal choice, here are a few alternatives to consider:

• Secured credit cards – These require a security deposit that becomes your credit limit. Use responsibly to build scores.

• Become an authorized user – Ask a friend or family member with good credit to add you as an authorized user on their credit card. Their positive history can help a thin file.

• Retail store cards – Department store cards are easier to qualify for and can help establish revolving credit.

• Starter loans – Some online lenders offer loans for short terms and low amounts to build credit.

• Credit monitoring services – Track your credit reports and scores so you understand what lenders see and how to optimize it.

Credit builder loans