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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.
Get the best rates and terms to fit your needs. Here are a few loans we'd like to highlight, including our award winners.
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.
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent, a Motley Fool service, does not cover all offers on the market. The Ascent has a dedicated team of editors and analysts focused on personal finance, and they follow the same set of publishing standards and editorial integrity while maintaining professional separation from the analysts and editors on other Motley Fool brands.
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent, a Motley Fool service, does not cover all offers on the market. The Ascent has a dedicated team of editors and analysts focused on personal finance, and they follow the same set of publishing standards and editorial integrity while maintaining professional separation from the analysts and editors on other Motley Fool brands.
Citi Personal Loan disclaimer:
**Rates as of 05-31-2024. Your APR may be as low as 11.49% or as high as 20.49% for the term of your loan. The lowest rate quoted assumes excellent credit and a loan term of 24 or 36 months. Your APR will depend on a variety of factors including your creditworthiness, term of loan, and existing relationship with Citi. For example, if you borrow $10,000 for 36 months at 15.99% APR, to repay your loan you will have to make 36 monthly payments of approximately $351.52.
There is a 0.5% APR discount if you enroll in automatic payments at loan origination. Additionally, existing Citigold and Citi Priority customers will receive a 0.25% discount to the interest rate. If you are in default, your APR may increase by 2.00%. No down payment is required. Rates subject to change without notice.
You must be at least 18 years of age (21 years of age in Puerto Rico). Co-applicants are not permitted. Loan proceeds cannot be used for post-secondary educational or business purposes.
If you apply online, you must agree to receive the loan note and all other account disclosures provided at loan origination in an electronic format and provide your signature electronically.
Credit cards issued by Citibank, N.A. or its affiliates, as well as Checking Plus and Ready Credit accounts, are not eligible for debt consolidation, and Citibank will not issue payoff checks for these accounts. If you are unsure of the issuer on the account, please visit https://www.citi.com/affiliatesproducts for a list of Citi products and affiliates.
Rates quoted are with AutoPay. Your loan terms are not guaranteed and may vary based on loan purpose, length of loan, loan amount, credit history and payment method (AutoPay or Invoice). AutoPay discount is only available when selected prior to loan funding. Rates without AutoPay are 0.50% points higher. To obtain a loan, you must complete an application on LightStream.com which may affect your credit score. You may be required to verify income, identity and other stated application information. Payment example: Monthly payments for a $10,000 loan at 8.49% APR with a term of 5 years would result in 60 monthly payments of $205.12. Some additional conditions and limitations apply. Advertised rates and terms are subject to change without notice. Truist Bank is an Equal Housing Lender. © 2024 Truist Financial Corporation. Truist, LightStream, and the LightStream logo are service marks of Truist Financial Corporation. All other trademarks are the property of their respective owners. Lending services provided by Truist Bank.
*Upstart Loan Disclaimer
The full range of available rates varies by state. The average 3-year loan offered across all lenders using the Upstart platform will have an APR of 21.97% and 36 monthly payments of $35 per $1,000 borrowed. For example, the total cost of a $10,000 loan would be $12,646 including a $626 origination fee. APR is calculated based on 3-year rates offered in the last 1 month. There is no down payment and no prepayment penalty. Your APR will be determined based on your credit, income, and certain other information provided in your loan application.