Credit Builder Loan: What They Are and How They Work

Credit is one of the key elements of personal finance

Being able to secure and leverage credit is a major component to most major financial acts, and thus being able to establish yourself as a reliable user of credit will be especially important to your finances.

What is Credit and Why is it Important?

Generally speaking, credit is an agreement between a lender and borrower, in which the borrower agrees to pay back money lent at a later date and with interest. Credit can be revolving, such as with a credit card where you can borrow up to a certain amount, or an installment where a lump sum in borrowed and paid back monthly.

What is a Credit Builder Loan?

The purpose of a credit builder loan is solely to build credit and the funds aren’t used to purchase anything. With a traditional loan, the lender gives you a sum of money (or a line of credit with a credit card) and you pay it back over a period of time.

Where Can You Get a Credit Builder Loan?

You should be able to establish a credit builder loan at some of the same financial institutions that offer traditional loans, including banks and credit unions, as well as other non-traditional institutions.

Alternatives to a Credit Builder Loan 1. Credit Cards

Another way to build credit is to open and use a credit card. The pros to using a credit card to build credit is that you’ll be buying things you want/need rather than tying your money up in an account that you can’t access until the loan is fulfilled.

2. Personal Loans

Another credit building option is to take out a personal loan. A personal loan is a traditional loan in which the funds borrowed can be used for any purpose. They are typically unsecured, meaning you don’t need to put up collateral to get one.

3. Become an Authorized User

The last credit building alternative we’ll discuss is becoming an authorized user on a credit card. An authorized user has the ability to use the credit card account for purchases but is not the account holder and is not the person the account terms are based on.

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