Pros and Cons of Credit Builder Loan!

Pros and Cons of Credit Builder Loan!
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#1

Hi all,

Am diligently working on rebuilding my credit fro the ground up. In my time here @Bev, @sara, @lweston and others(that aren’t coming up in the menu)have helped me grow in my credit repair/building efforts. I’m grateful for that guidance. Thank you all.

Anyway, this is about credit builder loans, pros and cons. So, I read up on credit builder loans and think it would be beneficial overall. One, it establishes a line of credit or a loan amount. Two, it’s reported to all three credit bureaus(ie: self lender), that helps raise your score in increments(based on on time payments). Three, after paying the loan agreement, you get the lump sum back, minus the interest. Four, it adds to the credit mix. Though credit mix is only a small portion of how your credit score is affected, it helps. And finally, an on time payment of the credit builder loan helps your score too.

Now a con of a credit builder loan. After you finish paying it off, the account closes. This may affect your length of credit account factor of your credit score.

Am I on point about this?


#2

Way to do your research, @deadmanmoshing!! We are huge fans of credit builder loans, since they do two things a lot of people need by building credit and an emergency fund at the same time.

I wouldn’t worry excessively about the closed loan’s affect on length of credit history. That’s a potential downside of any installment loan, but the effect is typically minor and should be more than offset by the gains from paying the loan off on time.

If you do get one, we’d love to hear how it goes–how the application process went and how quickly your scores improve, in particular.


#3

Hi @lweston,

That’s what I figured. I have an idea though. For example, let’s just say for arguments sake, that I apply and get an installment loan($525 for $25 a month for 12 months)and at the end of it instead of closing it, roll it over for another $525, etc., etc. for $1,050 after 12 months. I’m probably not going to see that happen but hey, it’s worth a shot.


#4

There are hardly any pros bro. All I see is cons here. Credit loan doesn’t do anyone any good in the long term.


#5

I disagree, but I’m curious about why you see it that way. Can you tell me more?


#6

Hi @denise.hilton,

I’m in agreement with @Bev on there not being any pros. Like @Bev I’m also curious how you came to that conclusion.

As I understand(or may not understand)it, a Pro is, a comment for whatever you’re talking about. A Con is a negative aspect of whatever you’re talking about. Correct me if I’m wrong but, that’s what I understand as what Pros & Cons are. Not intending to flame, just clarifying and expressing my opinion and knowledge of the the topic of discussion.


#7

Sorry, @deadmanmoshing, just saw this! I’m trying to remember if a bigger loan amount gives you better results, but I don’t think so. Hopefully your scores would be high enough after the first go around that you could qualify for an unsecured card or loan. In other words, there wouldn’t be much point in renewing the loan.


#8

@deadmanmoshing just wanted to give you a big shoutout for all that you’ve learned and contributed since you first joined this community. You’ve taken a very thoughtful approach that will no doubt serve you well in achieving your financial goals. :muscle:

Liz made a good point earlier about credit builder loans being a good way to also start building an emergency fund - is that something you’re including in your approach? I ask because, too often, even the best-laid credit building plans can be derailed by unexpected emergency expenses.


#9

Hi @Cori,
My apologies for just getting back to you. I contacted credit builder via email and was told no on the roll over question I asked. As, for your question about what I’d with the the loan money after it’s paid in full. There are a couple ideas I have in mind. One, use the money for a secured credit card or two, save it for emergencies in a savings account to earn interest on it. The other idea in mind is do something like buy something nice for myself(ie: a refurbished i7 computer, basic one runs about $140-$170 before shipping, if it applies, on ebay)and put the rest in a savings etc. etc.

I do have some good news to share. My score has come up almost 60 points since I last posted. Granted, it’s still in the poor range but, getting closer to average credit. Also too, I knocked off another another debt and the collection agency stop reporting it. And lastly, I was finally able to use Experian Boost. It raised my score 12 points today. So things are looking up. May be slow but, it’s steady.

I can’t express the deep gratitude for all of you here. I thank you sincerely for all the help, insight and guidance you have shared with me and others. Wishing you a fun, safe and happy 4th of July(intended for all of those who celebrate it).


#10

Unfortunately, having debt is the best way to raise your score. But rather than getting a loan, I would look at secured cards, and then once your score is high enough to get an unsecured credit card, trade up. I had a system, I’d only ever put gas for the car on my card, and pay it off every month. If you don’t utilise credit, you can’t GAIN credit.

Did this for 3 years after my mother ruined my credit and got bumped up from mid-400s to high 600s, enough to buy a murfreesboro tn house for sale and then a condo in ann arbor as a rental income property.


#11

@senabean
I respectfully disagree with you. It is possible to raise your score significantly without going into debt. I agree with you that secured cards can help, and so can credit-builder loans or share-secured loans.

If your score is low because of late payments or collections, it’s going to take some time — and positive information on your credit reports — to regain the points. But I would not recommend debt as a means to increase a credit score. Instead you can use the cards for convenience . . . but repay them right away (you could do it online as soon as purchases post, if you wish, to keep credit utilization low).


#12

That is great news, @deadmanmoshing! It’s so rewarding when you start to see your score rise in response to your wise credit moves. And then that gives you some fuel to keep going. So happy for you!

I think your plan for the credit builder loan is solid: use the accumulated money for an emergency savings account and get a secured card. Even peeling off a bit of the $$ for a treat can be wise idea if periodic rewards along the way help keep you going on your credit-building journey.

Way to go!


#13

@senabean You’re right that secured cards can be a really powerful credit-building tool, I’ve seen that with family members and friends. It’s kind of amazing how well they build a score if you stay on top of payments and how much of the limit you use, as you outlined. Your approach of just using it for smaller charges (gas) and paying off every month is perfect.

I do agree with @Bev that it’s not really “having debt” so much as it is just “money management.” It works best when you take the approach you did: You have the money in hand, but instead of paying cash you temporarily put it on a card and then pay it completely off by the due date in order to get the scoring effect.

I like to pay as I go, logging onto my credit card account weekly and wiping out the balance. That helps me 2 ways: I keep an eye on spending so I’m never shocked by the monthly bill, and I keep my credit utilization very low.

Just thought I’d throw that out there for the folks who hate the thought of debt. It helps to view credit card use as hyper-short-term debt versus the chronic, debilitating kind that’s a drain on so many lives.


#14

Hi all,
Thank you for the feedback! From the best option that most of you are in agreement with, the secured credit card after I finish credit builder loan is a wise option. My only concern with starting a credit builder loan is, the inquiry it’ll produce. I believe the rep. from them said it would be a soft inquiry. Either way I’ll take a hit score wise. But, what concerns me is the amount of inquiries I have(6, 6 and 10 respectively). That in itself, concerns me. Based on this updated info, what are your thoughts, should I or shouldn’t I?


#15

Hi @deadmanmoshing

A soft inquiry does not affect your credit score.


#16

Thanks @Bev, that’s what I thought.


#17

It’s interesting that they said it’s a soft credit inquiry, @deadmanmoshing. I guess since it’s a secured product that’s low-risk to the lender, that could make sense. But it’d be wise to really question them on that and verify.

Even if it does turn out to be a hard inquiry, the effect of those on your credit fades well before they age off your reports at 2 years. So I wouldn’t let the small ding of a hard inquiry keep you from executing what’s a well-reasoned plan for strategically building your credit. I bet the positive effect from having and paying the loan as agreed will more than offset that.


#18

@khinson,

I did investigate the soft inquiry and it was confirmed, that’s what in fact happens when you apply.

Well least to say I applied and got approved for the credit builder loan. A little nervous about it because, I don’t want to mess up with it. Overall though, I am determined to meet the obligation of this.


#19

That’s great, congrats! I’ll be interested to hear what effect you see on your credit, and how soon!