Are Credit Builder Loans Good for Building Credit?

Countless Americans want to boost their credit scores. If you’re one of them, you might have already started looking into what you can do to increase yours.

In doing so, you might have come across a recommendation for credit builder loans. Are credit builder loans good for building credit? Are there other options you should consider? Let’s take a closer look.

Are credit builder loans good for building credit?

Credit builder loans can be useful for building credit. Standard loans (like personal loans or car loans) are, as well, but if you have bad credit, limited credit, or no credit, you may not qualify for a regular loan.

How do credit builder loans work? You can think of them as a backward version of a traditional installment loan. Here’s what you can expect if you apply for a credit builder loan:

• The lender will approve you for a small amount of cash (usually up to $1,000)
• Instead of giving you the funds, the lender will put the money in a secure account
• You’ll make payments (including both principal and interest) to the lender
• The lender will report your payments to the credit bureaus, helping you build credit
• Once you complete the payments, you’ll receive the money

Some lenders will give you the funds along with any interest earned in the secure account.

Why credit accounts are a better option for most people

A credit builder loan can help you improve your credit score, but they aren’t the best option for many people. Credit accounts (meaning credit cards or lines of credit) may be superior, depending on your situation.

One example is Kikoff’s line of credit. Here’s how it works:

• You’re approved and gain access to a small credit line
• You use the credit line to buy items in our online store
• You pay off the purchases over time
• We report your on-time payments to the credit bureaus, boosting your credit over time

Unlike many credit accounts, our credit line is interest-free, which means you can focus on improving your credit without getting buried in snowballing debt.

Of course, our credit accounts aren’t the only ones out there. There are several reasons why credit accounts in general are often better than credit builder loans. Here are a few to consider.

No debt required

Do credit builder loans work to establish credit? They do, but like traditional loans, they come with interest and fees. If your lender puts your funds in a high-yield savings account or certificate of deposit (CD), the interest earned might help offset the fees, but that’s not a guarantee.

When you’re intentional about how you use credit accounts, you can build credit without actually incurring any debt.

That statement might give you pause. After all, most people know that credit card interest rates are some of the highest there are. However, if you use your card and pay off the statement balance during the grace period (the time period before interest is calculated), you won’t owe any interest.

Using a credit card to build credit doesn’t mean signing up for a lifetime of credit card debt. Many financial experts suggest getting a card, using it to buy a few things each month, and then paying it off before any interest accrues.

Revolving credit builds a more versatile credit profile

Your credit utilization ratio (the percentage of available credit you’re currently using) is the second most important factor when determining your FICO score. However, only revolving credit lines, including credit cards and home equity lines of credit (HELOCs), are used to calculate your utilization. Installment loans, including credit builder, car, and student loans, aren’t used to determine credit utilization.

Lenders want to see that you can responsibly manage different types of credit over time. Revolving lines of credit are a great way to demonstrate that.

Lower barrier to entry

In most cases, getting a credit line is easier than getting a credit builder loan. If you apply for a loan (even a secured one like a credit builder loan), the lender will check your credit score. You’ll also likely have to pay fees.

Traditional credit card companies will also check your credit when you apply for a card, but you don’t always have to have a hard inquiry to get approved. For instance, when you apply for a credit line with Kikoff, we don’t check your score at all.

Immediate access to funds

Many people try to access credit because of an immediate financial need. If you get approved for a credit card or line of credit, you can start using the funds right away.

Conversely, with a credit builder loan, you’ll have to start making payments on the loan before you receive any money. If you’re already dealing with financial hardship, credit builder loans won’t make it any easier.

Conclusion

Whether you’re looking to build credit from scratch or trying to bounce back from a damaged score, Kikoff can help. This dynamic credit-builder app offers a wide variety of tools to help people improve their credit scores. 

One of those tools is a credit line, but Kikoff also offers secured credit cards, debt-negotiation tools, rent reporting, and other resources. You can even track your spending and receive personalized insights to help you work toward your financial goals.

It’s totally free to join, and there’s no credit check when you sign up. Create an account today and start building a positive credit history with Kikoff.