Credit Builder Loans Can Really Help You Boost Your Credit Score Over Time

In a way, credit builder loans are loans that are "just for show". They do not serve a purpose in that a consumer is looking to borrow money based on the amount they qualify for (that's usually the case at least) but they are simply meant to display good payment history and help build credit for consumers. The good thing about credit builder loans is that you can apply for a very low balance credit builder loan ($300-$1,000), so you do not actually need a very large amount of money to boost your credit with this tactic. Again, most consumers aren't taking out these loans for the funds but simply to display that they can be responsible in paying back what they borrow. Once you’ve established good payment on the loan you’ll see an improvement in your credit score and overall credit worthiness.

Why Do Credit Builder Loans Work?

Credit builder loans help offset the negative impact of any missed or late payments you’ve had in the past. They do this by displaying "good payment history" on a secured account which is a very important part of your credit calculation. In a way, the good helps cancel out the bad. Whether it be bad payment history or missed payments or just a general lack of credit history in general, these loans will help establish your footing and get you re-grounded. This good payment history will help offset some of the negatives on a credit report or lack of credit history many consumers have. Payment history accounts for 35% of your credit score, so having a positive repayment history with these types of loans can do a lot to help your credit.

Credit builder loans are actually secured loans, so they will help increase your credit worthiness in this regard as well and “diversify your credit portfolio” as well as the types of credit you have established. The mix of credit you have on your credit report accounts for 10% of your credit score. So, if you do not have any established “secured” lines of credit, the boost will actually be more significant, since secured debt is looked at more favorably than unsecured debt by the FICO algorithm.

Lastly, completely paying off the credit builder loan on time will provide one more instance in which you demonstrate financial responsibility and show lenders that you are a good credit risk.

Credit builder loans provide a low-cost way for many to boost their score and demonstrate good repayment history and they can help consumers build credit without credit cards. That boost will be most significant for consumers that only have unsecured credit cards established and do not have a diverse mix of credit types on their report.