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Good credit can open up many opportunities, like low mortgage rates, great credit cards, and more. A credit-builder loan can help you move toward a good credit score, but it's one of the more expensive ways to build credit. Here, we'll cover the ins and outs of credit-builder loans -- and alternatives worth considering.
A credit-builder loan is a loan that can help you boost your credit score. This type of loan has one major difference from traditional loans: You won't get the money from a credit-builder loan until after you've paid off the loan completely.
Credit-builder loans can be helpful for people who have damaged credit or no credit history. However, because you still need to pay interest, credit-builder loans tend to be one of the more expensive ways to build credit. Make sure you consider all your options before deciding to go with a credit-builder loan.
Secured credit cards, becoming an authorized user on someone else's credit card, personal loans with a cosigner, and many other methods can also help you build a credit history.
With most secured credit cards, you'll pay no interest if you pay your bill on-time.
You can get a secured credit card with low or no credit. With a secured credit card, your regular payments are reported to the credit bureaus. This gives you a chance to build a credit history.
Here's how a secured credit card works:
Browse our top picks for secured credit cards to get started with a secured card.
One caveat: Be careful of the hidden fees and high interest rates charged by some secured credit card issuers. This is not a good option if you will struggle to pay your bill each month.
Becoming an authorized user on someone else's credit card is simple. You can become an authorized user with no credit or poor credit. Payments on the card will be reported to the credit bureaus, improving your score. And again, if you pay your bill on-time, you usually won't pay any interest fees.
Be careful with this method, though: The primary cardholder's activity can also affect your credit score. In some cases, if the primary cardholder is irresponsible, they could drag your credit score down.
To become an authorized user, read our guide to adding an authorized user to a credit card.
If you have bad credit or no credit, you can usually still get a personal loan with a cosigner. Often, you can get a lower interest rate with your cosigner than you would get on a credit-builder loan. You'll also receive your loan funds right away (instead of after the loan is paid off).
When you have a cosigner with excellent credit, a lender considers the strength of their credit score rather than the weakness of yours. Your on-time monthly payments are still reported to the credit bureaus, which improves your score.
If you're thinking of opening a personal loan with a cosigner, start by checking out our list of best personal loans.
If you miss payments on a cosigned loan, not only does your credit score suffer, but so does your cosigner's score. Asking someone to cosign for you is a big step. Don't try it until you're sure you can make all monthly payments on time.
Credit-building loans are a little different from other loans. Here's how they work:
It's important to note that you don't just repay the amount of money you applied to borrow. You'll pay interest every month, too. You might also pay possibly a small administrative fee. Be sure to ask about fees before signing up for a credit-builder loan.
When you take out a personal loan, the money you're borrowing is sent to you shortly after you sign the loan papers. That's not the case with a credit-builder loan. A credit-builder loan requires you to pay the loan off in full before you get any money from the lender.
Because of your limited (or damaged) credit history, the lender wants to be sure that you're going to pay the loan before they hand the money over. But this isn't a bad thing. It's good for your credit -- each time the lender reports an on-time payment to the credit bureau, your credit history becomes a little rosier.
If you need money right away, you may want to consider a personal loan for fair or average credit instead. If your credit score is extremely low, try a personal loan for bad credit. If you want to build your credit history, but you don't like the idea of a credit-builder loan, you might want to look into alternatives like secured credit cards or a cosigned personal loan.
Credit-builder loans are available through some banks, online lenders, and credit unions. Here's a sampling of where credit-builder loans are available and what they offer:
Managing a credit-builder loan doesn't have to be difficult. Here are three helpful tips for making a credit-builder loan work for you:
Your credit score impacts everything from the interest rate you pay on a loan to whether you can rent a home or land the job of your dreams. Whether you're just starting out or starting over, a credit-builder loan is worth consideration if you need to increase your credit score.
We've run the numbers and read through the fine print to find the loan options with competitive rates and low-to-no origination fees. Learn more about our top picks by clicking below.
A credit-builder loan is designed for consumers with a limited credit history and for people who need to rebuild their credit score after it's been damaged. It's different from other loans because you don't receive any money until the loan is completely paid off.
To get a credit-builder loan, look around at different lenders to find the ones with the lowest interest rates. Then, apply with the best lender. You'll need to provide ID, and possibly other documentation as well.
Credit-builder loans are available at banks, credit unions, and online lenders. Check with your local financial institution to learn if they provide credit-builder loans.
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