There are many reasons why you may not have credit. You could be young and just starting out. An immigrant who is new to our financial system. Or perhaps you’ve operated on cash and haven’t participated in the credit system to date. Whatever the reason, we have a way to help you slowly and securely build your credit score over time.
As someone trying to build credit from scratch or rebuild credit after mistakes you know finding affordable financing options can be a challenge. Many lenders shy away from borrowers with little credit history or low credit scores. But credit builder loans can provide a path forward.
In this comprehensive guide, I’ll explain how credit builder loans work and why they can be ideal for bad credit borrowers I’ll also outline the top places to get credit builder loans when rebuilding credit
What Are Credit Builder Loans?
Credit builder loans have an unusual structure compared to traditional installment loans. Here’s a quick overview of how they work:
- You “borrow” a set amount, often $300 to $1,000.
- The lender places this money into a locked savings account.
- You make fixed monthly payments over 6-24 months to repay the loan.
- The lender reports your on-time payments to credit bureaus.
- After repaying the loan, you get access to the funds in the savings account.
The key benefit is you build positive credit history through on-time payments. And the lender faces little risk since you don’t get the money upfront.
Benefits of Credit Builder Loans for Bad Credit
Here are some of the biggest advantages credit builder loans offer specifically for bad credit borrowers:
Get approved more easily – With the funds locked up, lenders feel more comfortable approving applicants with low credit scores.
Establish a credit history – For those starting with no credit it’s a way to build credit from scratch.
Repair poor credit – Making on-time payments helps improve your credit score over time.
Access affordable financing – Interest rates tend to be reasonable compared to alternatives like payday loans.
Teach good habits – Making monthly payments builds discipline that helps when getting regular credit later.
Save while improving credit – You get a lump-sum payment at the end, essentially forced savings.
Where to Get Credit Builder Loans for Bad Credit
Now that you understand the basics, here are some top places to get credit builder loans with bad credit:
Online Lenders
Self – Self offers credit builder loans from $25 to $150 per month over 24 months even with credit scores below 600.
MoneyLion – MoneyLion approves borrowers with no credit check and provides immediate access to some funds.
Credit Strong – Credit Strong offers larger credit builder loans up to $25,000 for all credit types.
Upgrade – Upgrade offers credit builder loans up to $7,500 with instant decision and next-day funding.
Credit Unions
Alliant Credit Union – Alliant provides credit builder loans up to $1,000 for members with bad credit.
Self-Help Federal Credit Union – Self-Help FCU serves communities with credit builder loans to build credit.
TDECU – TDECU in Texas offers credit builder loans with 6- and 12-month terms to members.
Veridian Credit Union – Veridian CU offers credit builder loans from $300 to $5,000 for Iowa residents.
Tips for Success with Credit Builder Loans
If you decide to get a credit builder loan to build or rebuild credit, here are some tips:
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Compare multiple lenders to find the best rates and terms. Fees and APRs can vary widely.
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Only borrow what you can comfortably afford each month. Defaulting defeats the purpose.
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Enroll in autopay to ensure you never miss payments and hurt your credit.
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Be patient. It takes time to rebuild credit. Focus on developing long-term habits.
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Pay more than the minimum when possible to pay down the balance faster.
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Consider adding a secured credit card alongside the loan to maximize positive reporting.
Alternatives to Credit Builder Loans
While credit builder loans can be useful, they aren’t your only option. Here are some other ways to build or rebuild credit:
Secured credit cards – These require a refundable security deposit and allow you to demonstrate responsible credit use.
Become an authorized user – Getting added as an authorized user on someone’s credit card account can give your credit a boost.
Credit-boosting services – Companies like Self Lender and Credit Strong offer products to add positive payment history to your credit reports.
Down payment assistance programs – Some nonprofits provide grants to cover down payments allowing you to buy a home and build mortgage credit history.
The Bottom Line
As you work to build or rebuild your credit, credit builder loans present some intriguing benefits like guaranteed approval and forced savings. Just make sure to compare multiple options as rates and structures can vary significantly.
With a disciplined approach and smart companion techniques like secured cards, credit builder loans can put you on the path to stronger credit and financial health.
Second Chance Credit Rebuilder
For DC Credit Union members with low credit scores, we offer a loan to help you raise your credit score over time.
We won’t deny you because of your low credit score, but you must be a member in good standing with a checking account and a funding source. We also require that you’ve previously borrowed from DC Credit Union and paid on time.
The Second Chance Credit Rebuilder process works like this:
- We issue you an unsecured loan or credit card with a limit up to $2,500.
- Get coaching from us on how to use credit wisely
- Make your loan payments on time
- We slowly step up your loan or credit card limit, growing your borrowing capacity along with your credit score.
- Once your score has gone above 550, you are a candidate for traditional loans and financing.
Five ways to improve your credit score:
- Pay all of your bills on time every month
- Keep balances low on credit cards, well below the credit limit
- Only open new credit accounts as needed, and don’t open a lot of new accounts too quickly
- If you’ve missed payments, get current and stay current
- If you can’t make payments, contact your creditors to work out a payment plan
Would you like more information about our Credit Builder Loans?
Stop by one our branches
The Ultimate Guide to Credit-Builder Loans in 2024!
FAQ
What credit score do I need for a credit builder loan?
Can you be denied for a credit builder loan?
Can I get a credit builder loan with no credit?
What is the best loan to build credit?
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Loan
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APR Range
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Loan Terms
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Credit Strong Best for Long Repayment Terms
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6.99%–15.61%
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2–5 years
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Digital Federal Credit Union Best Credit Union
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5.0%
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1–2 years
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MoneyLion Best for Small Loan Amounts
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5.99%–29.99%
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1 year
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Self Best for Large Loan Amounts
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14.14%–15.58%
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2 years
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Should you get a Credit Builder loan if you have low credit?
If you have a low credit score — or none at all — a credit-builder loan could be a great solution to help you establish or improve your score. With a credit-builder loan, you get to choose the loan amount and length of the repayment term, and lenders report your monthly payments to the credit bureaus — just like with a traditional loan.
How does a Credit Builder loan work?
A credit-builder loan works like the reverse of a traditional personal loan, in that the borrower pays monthly installments to the lender and then receives the money back at the end. The lender keeps the amount of the loan in a savings account that the borrower gets access to at the end.
Do credit builder loans improve your credit score?
Since credit-builder loan lenders report your payments to the major credit bureaus, credit-builder loans help you establish a payment history (which makes up 35% of your credit score). If you make your payments on time, you may generate (or improve) your credit score. Are credit-builder loans worth it?
How do I choose a Credit Builder loan?
When comparing credit-builder loan lenders pay special attention to the following: Loan amounts: Credit-builder loans tend to be for smaller amounts — usually between $300 and $3,000. Make sure to check the loan amounts offered by each lender to select the one that best fits your budget and needs.