Need Help Establishing Credit? Try a Credit Builder Loan

Borrowers needing help establishing credit most often start with getting a secured credit card. While secured cards are a great way to start establishing or re-establishing credit they do require you to put $300-$500 up front to secure the card. Unfortunately, some people may not have access to that much money. Luckily, there’s another option out there that is relatively new.

Some banks and credit unions are now offering what’s called a “Credit Builder Loan.” This is a low interest loan that was created specifically for the purpose of helping borrowers build a positive credit history. Some banks call it a “starter loan”.

How do they work? A borrower signs a contract with a bank to borrow money. The amount usually ranges from $500-$3,000. Once the loan is issued the borrower doesn’t actually get that money. It is placed by the bank in a savings account or a CD. The loans usually have a 12-18 month repayment plan. Over that time the borrower makes monthly payments to the bank until the loan is paid off. Only when the loan is paid off does the bank turn the money over to the borrower.

These loans are a win/win situation for both the borrower and the bank. There is literally no risk to the bank since the loans aren’t disbursed until they are paid in full. And they make money on the interest that is paid. The borrower “wins” as they have now established some positive credit that will have a beneficial impact on their credit score and they have not had to put any money up front to secure the loan.

From research that has been done the interest rates on these loans run from 3% to 13%. Although small credit unions usually seem to have the best rates, it’s best to shop around. Call several credit unions or go to their websites to see if they offer such a loan and then find out their interest rates on those loans.

Once you find a bank that offers this loan it is very important to find out from them if they report to all three credit bureaus…Experian, Trans Union and Equifax. Some small banks and credit unions may only report to one or two bureaus. So it is very important to find one that reports to all three in order to get the most benefit from your loan.

If a Credit Builder loan does not feel like a good fit for you in establishing credit, a secured credit card is always a good option and is relatively easy to get. The Credit Builder loan just expands those options a bit.