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Neal Frankle
I’m Neal Frankle, Certified Financial Planner™. Credit problems are a serious business. In fact they changed my entire family life when I was 16. This site is here to help you repair your credit without getting ripped off. Read my story.
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Using a Credit Builder Loan to Rebuild Your Credit

by Neal Frankle, CFP®

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If you have a bunch of bad credit in your past, and you are looking to get a fresh start, you should take a serious look at credit builder loans.

They can be the perfect way to rebuild your credit, and the whole process is surprisingly easy and painless.

What is a Credit Builder Loan?

A credit builder loan is exactly what the name implies – a loan that has been created to enable the borrower to build credit.

The loans can be used for a person who has little or no credit at all, or for a person who is attempting to rebuild their credit after a bad credit experience.

Credit builder loans work similar to secured credit cards, except that rather than being revolving credit lines, they are actually installment loans. They have definite terms, as well as fixed interest rates and fixed monthly payments.

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But like secured credit cards, credit builder loans are also secured loans. Except that rather than you having to deposit money into a savings account or certificate of deposit to secure the loan, the proceeds of the loan are what fund the account.

For example, if you take a credit builder loan for $1,000, the money will be deposited into your savings account, which will then be used as collateral for the $1,000 loan.

You will make monthly payments on the loan, and then once it is paid off, the savings account will be fully yours. In that way, not only will you be rebuilding a good credit rating, but you will also be building up savings.

Alternatively, the credit union may set up an arrangement in which monthly payments are automatically deducted from the savings account.

If they do, it will enable you to build a positive credit reference in a completely passive way. The monthly payments will be made automatically, which ensures that they will be made on time.

Since there is interest on the loan, you will have to add a little bit of extra money to the savings account to cover the interest.

The credit union will specifically report the payment experience to the credit bureaus to help you develop a credit score.

How a Credit Builder Loan Can Help Rebuild Your Credit

If you have no credit at all, or if you have bad credit, a credit builder loan will enable you to develop a positive credit reference, and one that is practically guaranteed.

It’s the perfect way to begin rebuilding your credit after you have had a run of bad credit.

In order to get the best results from a credit builder loan, you are best to go for a loan that has a relatively short term.

A loan running for 12 or 18 months will not only enable you to develop a pattern of timely payments, but it will also enable you to have a paid loan fairly quickly.

This is important because a paid loan is actually one of the best credit references. It’s an indication that you have successfully managed a debt, paid it off completely and on time.

That should help to make it easier for you to qualify for other loans, and even credit cards, in the future.

Qualifying for a Credit Builder Loan

As a rule, credit builder loans are easier to qualify for than other types of loans, and especially credit cards. Many credit unions don’t even do a credit check, or even verify your income.

Since the loans are fully secured, and often paid automatically, your credit and your income aren’t even factors.

When you apply for credit builder loan, it is assumed that you have no credit at all, or that you are attempting to recover from a bad credit history. The whole purpose of this loan type is to offer you a fresh start.

Credit builder loans tend to be on the smaller side, ranging from $500 to $5,000. Loan terms can range from 12 months to 48 months, but as discussed above, you should generally want to keep the loan on the shorter side, so that you can pay it off as quickly as possible.

There’s also good news on the interest rate side. Many credit builder loans charge very reasonable interest rates. It isn’t at all unusual to see rates in single digits.

Once again, this is because the loans are fully secured, and represent very little risk to the credit union that issues the loan.

And once again, the credit union will report the loan experience to the credit bureaus, helping you to build – or build up – your credit score.

Get Your Bad Credit Fixed Before You Apply for a Credit Builder Loan

If you do decide to apply for a credit builder loan, you should do your best to get your credit repaired before you do.

Just as is the case with secured credit cards, while a credit builder loan will help to give you a good credit reference, it will not erase the bad credit in your history. That’s something that you will have to take care of for yourself.

Make all of your payments on time to all accounts from now on.

If you have any past due balances, including collections and judgements, pay them off as quickly as possible.

If you have loan accounts that are particularly difficult to deal with, or if you simply have too much bad credit, you will need to get professional help.

The best course of action in that situation will be to seek that help from a good credit repair law firm.

Since they know the law in your state as it applies to credit, and since they deal with credit issues all of the time, they will be much better at helping you to repair your credit than you can for yourself.

Often, just the awareness by a creditor that you have engaged the services of an attorney will get them to be more agreeable. The whole credit repair process will then go more smoothly, and come to a conclusion much more quickly.

But once you get your credit problems fixed, it will be time to begin rebuilding your credit. And when that time comes, the credit builder loan will be one of the best ways to get that done.

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