How Do Credit Builder Loans Affect Revolving Credit Utilization?

If you have been thinking about using a credit builder loan to help your financial profile, it’s important to consider all of the variables. One of the main factors used to determine your credit score is the credit utilization rate.

You may be wondering, “Do credit builder loans affect credit utilization?” No, they don’t, because loans are not revolving lines of credit. They can be useful for improving your score but don’t have the same impact as your revolving credit. 

Learn more about whether credit builder loans affect credit utilization and answers to questions like, “Is a credit builder loan revolving credit?” 

Credit builder loans don’t affect revolving credit utilization

Your credit utilization refers to the percentage of available revolving credit you are using. For example, if you have $10,000 in total revolving credit limits and have balances totaling $5,000, your utilization rate is 50%. 

A credit builder loan is an installment account. You borrow a fixed amount and pay it back in equal monthly payments. There’s no reusable credit limit, which means there’s nothing to “utilize.” That’s why scoring models don’t factor these loans into your utilization rate. 

If you want to lower your utilization rate, a credit builder loan won’t help you get there. To do that, you’ll need to pay down balances. Opening a new revolving credit account could also lower your utilization rate, as long as you don’t rack up a bunch of debt on the new card. 

The difference between installment and revolving credit

The key features of installment credit, such as a credit builder loan, include:

• Fixed loan amount
• Set repayment schedule (i.e., 36 months)
• Predictable monthly payments 
• Ends once you pay it off

Revolving credit, such as credit cards or credit accounts, offers a flexible borrowing limit. You enjoy ongoing access to funds. The balances vary, which means your payments do as well. You have to actively manage your utilization patterns to maintain a healthy score. 

Both types of accounts will be factored into your debt-to-income ratio, and they will show up on your credit report. However, a credit builder loan is all about building a steady payment history over time. Credit cards are an exercise in financial discipline. 

How credit builder loans impact your score

Do credit builder loans affect credit utilization? No, they don’t. However, a credit builder loan can positively impact your credit score by adding positive payment history to your profile. Here’s how they help:

• Payment history is the most heavily weighted factor used to calculate your credit score
• Making consistent, on-time payments builds a positive track record
• Having both installment and revolving accounts can strengthen your credit mix
• Keeping accounts open and in good standing over time contributes to a longer credit history

Revolving accounts tend to have a bigger impact because they influence your utilization rate. Still, credit builder loans have value and can be part of your financial plan. 

How a credit account can help where a credit builder loan can’t

If you’re trying to optimize your credit score, revolving credit becomes especially important. A credit account can help in ways a credit builder cannot, such as:

• Lowering your credit utilization
• Building ongoing credit activity
• Managing revolving credit well can have a larger score impact

The key is to be disciplined and use your credit with intentionality. Tools like Kikoff can help you explore your credit-building options and add positive payment history, resulting in your becoming a more appealing loan applicant over time. 

Conclusion

Credit builder loans can be a valuable part of your financial strategy, especially if you want to diversify your credit mix. But if your goal is to unlock more scoring potential, credit-building platforms like Kikoff should be at the top of your list.

With Kikoff, you’ll gain access to a credit account and numerous tools to add positive payment history to your profile. Build credit with Kikoff — no hard credit check to sign up