What Is a Credit-Builder Loan? - NerdWallet

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What Is a Credit-Builder Loan?

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What Is a Credit-Builder Loan?

Credit Score, Personal Finance, Personal Loans
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What Is a Credit-builder Loan?

Credit-builder loans can help you build your credit score, and they don’t require good credit to start with.


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They’re not widely advertised and are generally offered by smaller financial institutions, such as credit unions and community banks. The purpose, as their name suggests, is to help people achieve credit respectability.

Financial institutions would like to see you succeed. After all, if you become a customer, you’re more likely to make money for them in the future. To make sure it doesn’t get burned on the loan, the lender will set strict limitations. Think of it as training wheels for credit.

Credit-builder loans go by many names, such as the catchy “Fresh Start Loans” or “Starting Over Loans.” If you’re looking to restore your credit with an installment loan, ask your bank or credit union about secured personal loans designed to help people who need to help build credit.

Secured credit cards have long been suggested as a means of credit building — and they can be very effective — but you first have to have enough money to pay the security deposit.

If you have an income but can’t pay a deposit for a secured credit card, credit-builder loans offer a way around that hurdle.

How credit-builder loans work

You apply for the loan, whether you have bad credit or no credit, and you are approved, but there’s a safety net for the lender. The money you borrow is deposited in a savings account — one that you cannot access until you have fully repaid the loan.

If you pay the loan as agreed, the financial institution promises to send a good report to the credit bureaus. A 2013 study showed an average improvement of 35 points with six months of on-time payments for loans as small as $100.

At the end of the loan term, you get the money — and likely a better credit score.

But be sure to pay on time. If you miss payments, that negative information would also be reported. The financial institution doesn’t take a big risk when it lends to you, because it can reclaim the money if you don’t hold up your end of the bargain.

If you’re looking for a credit builder loan and your credit union or community bank doesn’t offer them (or even know what they are), you might try a Community Development Financial Institution. These organizations exist to help lower-income communities, and there are about 1,000 of them in the United States. Government grants and other incentives make these small-dollar loans more attractive to financial institutions.

Online lenders include Self Lender, which offers $1,100 loans repaid over a year at $100 a month. At the end, you get $1,100 and a credit score with a year of on-time payments.

How secured installment loans work

You don’t have to be low-income to have crummy credit or a need to improve. If you have money in the bank, you may have another option for an installment loan: a share- or certificate-backed loan.

In that case, a deposit you already have at the financial institution is the collateral, and that money is frozen until the loan is repaid (or it may be incrementally thawed, as the loan is repaid). So if you have funds on deposit at a small bank or credit union, it may be worth asking if you can borrow against them to help re-establish your standing. Other lenders may allow you to borrow against the value of your car.

You may have other options for building credit

Secured loans such as credit-builder loans tend to be a good deal because the collateral reduces risk for the lender and greatly reduces the interest rate, which is typically well under 10%. The catch, of course, is that you don’t get the money until the loan is repaid.

If you are trying to build credit and need the proceeds of a loan immediately (for debt consolidation, for example), you will probably need to take an unsecured personal loan. That means the lender has no collateral, just the strength of your credit history, to rely on. If your credit is damaged or thin, you’ll pay higher interest rates, sometimes as much as 36%, which tends to be the ceiling with most lenders.

Some lenders who will grant you unsecured personal loans without checking your credit at all, but those installment loans are much more like payday loans. The lenders don’t check your credit, but they also don’t report to credit bureaus unless you default. And the loans carry interest rates that can easily reach 300% or higher.

Bev O’Shea is a staff writer at NerdWallet, a personal finance website. Email:boshea@nerdwallet.com. Twitter: @BeverlyOShea.


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How Paying Rent Can Affect Your Credit

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How Paying Rent Can Affect Your Credit

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You can trust that we maintain strict editorial integrity in our writing and assessments; however, we receive compensation when you click on links to products from our partners and get approved. Here's how we make money.
How Paying Rent Can Affect Your Credit

A lot of people who don’t have much in the way of a credit history do have a history of paying rent on time. If that information showed up on their credit reports, it might help their credit scores.

You can’t report rent payments yourself. But rent-reporting services can get your credit reports to reflect your rent payments fairly easily, at a cost that ranges from free to more than $100 a year.

» MORE: See your credit score for free with NerdWallet

But here’s the catch: There are many different credit scores calculated from the information on your credit reports, and most credit card issuers and lenders don’t use the scores that consider rent payments. When you apply for credit, you don’t generally know which score the lender is going to pull when it checks your credit, or which credit bureau’s report it will use.

To use a rent-reporting service effectively, you’ll need to know which credit bureaus it will report your payments to — and which credit scores take those payments into account.

Which credit scores consider rent payments?

Rent payments remain rarely reported. A FICO spokesperson estimated that less than 1% of credit files contain rental entries, or “tradelines.”

All three major credit bureaus — Experian, Equifax and TransUnion — include rent payment information in credit reports if they receive it.

Although rent is reported as a tradeline — much like a mortgage or car loan would be — it’s not treated the same for scoring purposes, says consumer credit expert Barry Paperno, who blogs at Speaking of Credit. “Unless a prospective lender includes that information outside a credit score, it may not help,” he says.

Only a few credit score algorithms consider the information in calculating a score. The most commonly used versions of the FICO score don’t use rental payment information, but FICO 9 and FICO XD do, as does VantageScore.

Some renters use the reporting services to get credit through lenders that are known to use those scores. At least one rental reporting company tells its customers which credit cards to apply for — and all credit scoring formulas include credit card payments.

How does rent reporting compare with other types of credit building?

Other credit-building strategies rely on more traditional tradelines. You can get a secured credit card, for example, or a credit-builder loan. Revolving debt, such as credit cards, and installment loans are considered in virtually every credit score.

“Rent information will help lenders that are prospecting for possibly creditworthy people who have been overlooked,” NerdWallet columnist Liz Weston says. “But most lenders are still focused on attracting people with good traditional credit scores. If you want the best rates and terms, you have to build credit the old-fashioned way — with credit accounts.”

Still, it is possible for you to be approved for a loan without a FICO score — even a loan as large as a mortgage — but you will likely be working with a small lender.

And having rental payment information in your credit report can be useful if you rent again. Landlords prefer tenants who can show a history of paying on time. A study by the nonprofit Credit Builders Alliance showed that rent reporting both increased on-time rent payments and credit scores (Vantage 3.0) for participants.

Which services will report your rent payments to lenders?

There are several ways to get records of your payments in front of lenders. Among them:

Rent Reporters: Setup is free, and the service is free for 15 days. After that, if you pay by e-check, there is a processing fee of $3.95, and if you use a credit or debit card, it’s 2.95%. (Note: If you are paying Rent Reporters by credit card, you already have a tradeline on your credit report.) Rent payments may be reported retroactively, and it sends rent payment information to the three major credit bureaus.

Rental Kharma: Initial setup is $40, and then the service is $9.95 per month. During enrollment, you can report payments made in the previous 24 months. It reports to TransUnion.

RentTrack: The service costs $1.95 a month (unless paid by the landlord and offered free to tenants) and reports to all three credit bureaus. A 24-month look back at previous payments may not be available if multiple leases are involved.

ClearNow: This service debits your rent from your checking or savings account. There’s no cost to tenants, and, if you opt in, payments are reported to Experian.

PayYourRent: Variable fees, depending on how rent is paid; in some cases the fees are paid by management. It reports to TransUnion and Experian.

Next steps

If you’re shopping for a way to have rent reported on your credit report, here are questions you should ask of service providers. Also, check to see if your property manager already works with one.

  • What would my total costs be for a year of service, including any setup fees or fees for reporting previous rental history? (Some services can go back as far as 24 months.)
  • How do you protect my personal data?
  • Which of the major credit bureaus do you report to? (All three is ideal.)
  • Do you provide free access to credit scores, and if so, which score(s)?
  • How soon should I expect the information to appear on my credit report?
  • How can I cancel the service?
  • What happens if I have a dispute with my landlord? In some states, renters have a right to withhold payment if the landlord fails to keep the unit repaired and habitable. Critics have expressed concern that consumers might be afraid to exercise tenant rights for fear of being reported late to the credit bureaus.

Bev O’Shea is a staff writer at NerdWallet, a personal finance website. Email: boshea@nerdwallet.com. Twitter: @BeverlyOShea.

This article was updated. It originally published Aug. 14, 2014.

  • RMR

    I set up a rent payment with a reporting service and 6 months later, my credit score jumped almost 70 points!

  • RMR

    I set up a rent payment with a reporting service and 6 months later, my credit score jumped almost 70 points!

  • RMR

    I set up a rent payment with a reporting service and 6 months later, my credit score jumped almost 70 points!

  • BigPickture

    PayLease finally reported my rental account to TransUnion (2 months after registration). Waiting for this to show up on Experian.

    Bad part, they only show details from the date you enroll in this service, not from the day you made your first payment with them. So effectively, it reduced my credit’s average age of the accounts ( and score fell by 10 points)

  • Robert at SitBackPain

    great info but I think the pricing needs updating ; )

  • Carrie Simmons

    I’m trying to get the n a me of the one I signed up with. Individual landlord. They report your past r e nt no program for you to have to pay your rent through a service. They just verify the rent. I even was set up for a 3 payments . I erased all my email and can’t rember their name. The payments start next week.

  • Carrie Simmons

    These companies don’t get all the dates reported of your payments

  • Shirley Chang

    I used RentReporters and my score went from a 640 to 800+. It helped me save $130 a month for my mortgage payment when I refinanced. RentReporters also has a coupon code for signing up $20 off using code TMUK.