What are Credit Builder Loans?

You may be surprised to learn there are loans to help build credit. The credit builder loan was created to help people establish or build a credit history and credit score.
 
Credit builder loans are small loans to build credit that have a term of six to 24 months, with amounts ranging from $300 to $1,000. After you apply and are approved for the loan, the credit union or bank will deposit the full loan amount into an account for you. You’ll make monthly payments over the course of the loan term until the full amount is paid. Upon satisfaction of the loan, the money will be released to you. As you make on-time monthly payments, you build credit because all payments are reported to the credit bureaus.
 
Credit Union of Southern California (CU SoCal) has provided low-interest loans to Southern Californians for over sixty years, and we’re loved by our Members for our remarkable services and affordable fees.
 
Even if your credit history isn’t perfect, don’t worry, because unlike a traditional bank, we don’t think that your credit score tells the whole the story. Come in and talk to us and let’s see what we can do!
 
Read-on for details on how to get a credit builder loan.
 

How Do Credit Builder Loans Work?

If you do not have a credit history or have bad credit, credit builder loans can help!
 
When you’re approved for the loan, the loan amount will be deposited into an account for you, and each month you will make payments toward pay-off of the loan. Your payments are reported to the three major credit bureaus (Experian, TransUnion and Equifax).
 
As long as you make payments on-time you will build good credit. This will also boost your credit score. If you do not pay on time, your credit score will decline. Before accepting a credit builder loan, be sure you can afford the monthly payments. At the end of the loan term, the money will be released to you.
 
Applying for a credit builder loan is easy, through a credit union, bank or online lender.
 
Credit union credit builder loans, including the CU SoCal Credit Builder Loan, start with completing an application. Once approved, CU SoCal will put $1,000 in a special account for you. Although you do not receive the funds up-front, after successfully making payments for one year, you receive $1,000 cash.

Your payments will be reported to all three major credit bureaus, helping you build a credit history and credit score over the course of the 12-month term


Are Credit Builder Loans Worth It?

A credit builder loan is worth it if:
  • You’re not in a rush to establish credit or build or raise your credit score.
  • You do not have existing debt.
  • You have reliable income and can make on-time monthly payments.
A Credit Builder Loan is Not Worth it:
  • If you need to establish or repair your credit fast (in less than 12 months).
  • If you do not have steady employment and income.
  • If you have existing debt that would make it challenging for you to make an additional payment each month. 
If you need your credit score to improve quickly, try the strategies in How to Rebuild and Improve Your Credit Score.


How Much Will A Credit Builder Loan Raise My Credit Score?

According to a Consumer Financial Protection Bureau (CFPB) study on credit builder loans, study participants without existing debt saw their credit scores increase by 60 points more than participants with existing debt. For participants without existing loans, opening a credit builder loan increased their likelihood of having a credit score by 24%. 


Why Credit Score Is Important?

Credit is a central part of any loan application process: whether you are applying for a credit card, personal loan, auto loan, a new mortgage, or a mortgage refinance, a credit history and credit score are the primary factors all lenders will look at and use to determine a borrower’s ability to repay a loan.
 
Some employers will even look at your credit score during the hiring process to gauge your trustworthiness and ability to manage finances.
 
Having good credit means you’ll benefit from lower interest rates on loans, more buying power, and better loan terms overall.


How Credit Scoring Works

Credit scoring is a system creditors and lenders use to help determine whether to give someone credit or a loan.
 
Your credit history — including information about your credit, bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and the age of your accounts — is collected from your credit applications and your credit report.
 
A credit scoring system awards points for each of the above factors, creating a score. A credit score generally indicates how creditworthy a person is, and how likely they are to repay a loan and make on-time payments.
 
The most widely use credit scores are FICO scores, which were developed by Fair Isaac Company, Inc. FICO scores range from 350 (high risk) and 850 (low risk).
 
Lenders look at credit scores to determine who is most likely to repay a debt. People with a low credit score will be charged a higher interest rate on loans, the lender’s way of avoiding loss if payments are late or missed. People with a high credit score will be offered lower inter rates on loans as a reward for being low-risk for missed or late payments.
 
FICO Scores are calculated using credit data from each individual’s credit report. This data is grouped into five categories: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and credit mix (10%).
 

Here’s how each of these categories impacts a credit score:

Credit History Length: How long your credit accounts have been established and how long it has been since you used certain accounts?
 
Payment History: Have you paid past credit accounts on time?
 
Credit Mix: FICO Scores will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans.
 
New Credit: Opening several credit accounts in a short amount of time represents a greater risk, especially for people who don't have a long credit history.
 
Amounts Owed: If you are using a lot of your available credit, this may indicate that you are overextended. Lenders may be less likely to lend to you.
 
Credit Inquiries: Soft inquiries such as viewing your credit report will not affect your FICO Score. Hard inquiries such as applying for a new credit card or mortgage will affect your score.
 
Debt Burden: This is the total amount of debt you owe, due to loans and credit cards. Having a large debt burden can limit the amount of new credit available to you.
 
For more details read our blog article, How to Rebuild and Improve Your Credit Score.


Where Can You Get a Credit Builder Loan?

Credit Unions: Credit union credit builder loans are some of the most popular.

As not-for-profit organizations, credit unions reinvest profits back into the organization, so Members benefit from lower rates on loans. CU SoCal does not charge fees on credit builder loans or personal loans. Credit builder is a type of personal loan to build credit.
 
Banks: Traditional banks tend to have higher credit score requirements than credit unions. Before you apply, ask about application fees and how long the approval process will take.
 
Online Lenders: While online lenders offer credit builder loans, they don’t provide the personalized customer service of a local credit union or bank. When working with an online lender be sure you fully understand the terms of the loan and know how to reach customer service if you have questions or concerns.


How to Manage a Credit Builder Loan

Like all loans, a credit builder loan requires on-time monthly payments. Before applying for a credit builder loan, consider whether you can afford the monthly payments.
 

Here are some tips for managing a credit builder loan:

Pick the Right Credit Builder Loan for You: Not all loans are created equal by the lenders who offer them. Be sure you fully understand the terms of the loan repayment, including the length of the loan and your payment responsibilities.
 
Make Payments On Time: Building good credit is based on making on-time monthly payments according to your loan terms, so don’t miss any payments or pay late.
 
Monitor Your Credit Score: Credit monitoring and credit score monitoring services are available through credit unions, banks, credit card companies, credit bureaus, and independent providers. CU SoCal offers free credit scores and reports to all Members through Credit Score and More in Digital Banking.
 
Decide What to do with the Proceeds: At the end of the loan term, the money you’ve paid toward the loan become yours — your reward for a job well done! Decide ahead of time how you will use the money. Will you pay off other bills and debt? Put the money into an emergency fund or savings account? Or, use it to take a vacation?


How Much Does a Credit Builder Loan Cost?

Fees associated with a credit builder loan will vary depending on the lender. Credit union credit builder loans usually have low fees and no application fee. Banks and online lenders will likely charge administrative fees, and all lenders will charge a late payment fee. The interest rate charged on the loan amount is typically between 6% and 16%.


Features and benefits of the CU SoCal Credit Builder Loan:

  • The $1,000 loan and is held in a deposit account for 12 months.
  • No credit inquiry is made when you apply.
  • No loan application fee is charged.
  • The interest rate is the Credit Union’s 12-month certificate rate plus 5%.
  • Funds are available after 12 consecutive on-time monthly payments.

 

Why Savvy Consumers Choose CU SoCal

For over 60 years CU SoCal has been providing financial services, including car loans, personal loans, mortgages, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
 
Please give us a call today at 866.287.6225 today to schedule a no-obligation consultation with a personal loan representative.
 
 
Open an account today!

Building Better Lives

Credit Union of Southern California (CU SoCal) is a leading financial institution empowering those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County to reach their goals and build strong financial futures. CU SoCal provides access to convenient money management services and offers competitive rates and flexible terms on auto loans, mortgages, and VISA credit cards—turning wishing and waiting into achieving and doing.

 

562.698.8326 | 866 CU SoCal Se Habla Español

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