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What is a Credit Builder Loan and Do They Work?



Credit Builder Loan Title Image

A credit builder loan is a loan offered by a community bank or credit union that helps you rebuild credit or establish credit for the first time. Usually, you don’t need a good credit score—or even any score at all—to apply for one.

How Do Credit Builder Loans Work?

Credit builder loans allow you to borrow a sum of money that you can access only after you have paid off the full amount. This allows you to make consistent, on-time repayments that can help boost your credit score.

This is a low-risk way for lenders to lend you money while giving borrowers with poor or no credit history the ability to build credit. The loan amount can be as low as $300 and as high as $5,000 depending on the source of the loan. It’s held in a locked savings account while you pay it back over 6 – 24 months.

The positive payment history is reported to the three major credit bureaus: Experian, TransUnion and Equifax. Once the loan is paid off, the money is yours. Sometimes, the interest you paid is refunded, too.

Key Things to Know About Credit Builder Loans Image

How Do Credit Builders Help My Credit Score?

Credit builder loan repayments are reported to the credit bureaus, demonstrating that you’re a responsible borrower.

If you’re just starting out and have no credit history, you’ll receive a FICO® score after around six months. Your score is likely to start out quite high because you have no bad credit history.

If you already have a credit score, you should expect to see an increase with a credit builder loan. Payment history makes up 35 percent of a person’s FICO® credit score. Making on-time monthly payments can have a truly positive impact.

Pros and Cons of Credit Builder Loans

There are several advantages of a credit builder loan over a personal loan, but there are also some downsides to consider. Take a look at our list of pros and cons below.


  • A credit builder loan is easier to get than an unsecured personal loan. The lender keeps the money until you’ve paid it back, so they see you as less of a risk.
  • You don’t need a glowing credit report to get one. When applying, your income and bank accounts are checked, rather than your credit history.
  • Paying back the loan in advance helps you develop good financial habits. This is crucial for building a good credit score.
  • You’ll improve your credit score and have the moneyyou saved. After you’ve completed payments, you’ll receive the money.


  • Interest rates on credit builder loans can be quite high. Shop around to find the best rates.
  • Some lenders may be too small to report to all three major credit bureaus. Try to find one that reports to all three, as this will give you the best chance of improving your score.
  • You’ll need to become a member to get a credit builder loan offered by a credit union. This usually isn’t difficult but is something to be aware of.

How Do I Get a Credit Builder Loan?

To apply for a credit builder loan, some typical requirements; you’ll need to be at least 18, have a bank account, a social security number and proof of income. Make sure to shop around when looking for a loan because rates and terms vary.

Typical Credit Builder Loan Requirements image

Here are important aspects to consider:

  • Make sure the loan has a good interest rate. Some lenders also refund the interest to you if you pay off the loan successfully.
  • Check that the loan will be reported to as many of the credit bureaus as possible, ideally all three.
  • Check for other terms and conditions. Some organizations require you to take workshops or classes in financial literacy while you pay off the loan.

Who Offers Credit Builder Loans?

Credit builder loans are offered by many financial institutions, including credit unions and banks. You won’t find them through the big banks, as credit builder loans aren’t profitable enough and they’re rarely advertised.

  • Credit unions: To get a loan from a credit union you need to become a member. Typically, you must live in the area where the credit union is based, or be employed by a certain company. You might also need to pay a membership fee.
  • Community banks: Community banks that focus on the banking needs of people in a local area may also offer credit builder loans. 
  • Financial technology companies: Finance companies are becoming aware of the benefits of offering credit builder loans. Self, based in Austin, is an example of a start-up that offers these loans. You can apply online and track your loan via an app.

How Much Does it Cost?

Fees, interest rates and loan amounts—as well as the terms of repayment—vary from lender to lender.

  • Fees: Often there’s an administration fee of $8 – $15 to activate the account. There may also be late fees if you miss a payment.
  • Interest rates: Interest rates vary depending on the lender but can be as low as 15.92 percent or as high as 36 percent. 
  • Payments: You’ll need to put money each month toward making payments. On a loan of $1,000 over 12 months at an APR of six percent, 12 installments would be around $86.08 each.

How Else Can I Build Credit?

A credit builder loan isn’t the only way to build credit. Other options include:

  • Get a secured credit card: A secured credit card requires you to make a cash deposit before you use the card. Like a credit builder loan, payments are reported to the credit bureaus, helping you build a positive credit history with on-time payments.

    Interest rates are typically quite high, though. But if you make a certain number of payments on time, with many issuers you’ll be eligible for a credit limit increase or an unsecured card with the same company.

  • Report your rent: Your landlord may be able to report your rent to the credit bureaus or you can join a service that reports it for you, for a small fee.

  • Become an authorized user: A low-risk way of building credit is to become an authorized user on someone else’s credit card. If you have a friend or family member who’s willing to add you to their credit card, any payments will appear on your credit history. 

  • Join a lending circle: Lending circles are a form of informal borrowing where a group of people pools money to create a loan, which is then lent out to one person at a time. Payment activity is reported to the credit bureaus.

How Can Credit Repair Help Me Build Credit?

An easy way to improve your credit score is to take a good look at your credit report for any mistakes or outdated information. These negative marks can unfairly bring down your credit score. 

Through credit repair, you can dispute these inaccuracies and have them removed from your credit report. Having an accurate credit report can boost your credit score and the likelihood of getting approved for credit cards and loans. Contact Lexington Law today to learn how credit repair can help you.

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Credit Cards

Does Getting Joint Credit Cards Have an Impact on Both Spouses’ Credit?



couples credit history

While marriage can help you improve your financial situation, it does not automatically mean that you and your spouse will share a credit report. Your credit records will remain separate, and any joint accounts or joint loans that you open will appear on both of your reports. While this can be advantageous, it’s critical to remember that joint account activity can effect both of your credit scores positively or negatively, just as separate accounts do.

Users Who Are Authorized

An authorized user is a user who has been added to an existing credit account and has been granted the authority to make purchases. Authorized users are typically issued a card bearing their name, and any purchases made by them will appear on your statement. The primary distinction between an authorized user and a shared account owner is that the account’s original owner is solely responsible for debt repayment. Authorized users, on the other hand, can always opt-out of their authorized status, although the principal joint account owner cannot.

If your credit score is better than your spouse’s as an authorized user, he or she may benefit from a credit score raise upon account addition. This is contingent upon your creditor notifying the credit bureaus of permitted user activity. If your lender does report authorized users, the activity on your account may have an effect on both you and your spouse. However, some lenders report only positive authorized user information, which means that late payment or poor usage may not have a negative effect on someone else’s credit. Consult your lender to determine how authorized users on your account are treated.

Joint Credit Cards Have an Impact on Your Credit Score

Opening a joint credit account or obtaining joint financing binds both of you legally to the debt’s repayment. This is critical to remember if you divorce or separate and your spouse refuses to make payments, even if previously agreed upon. It makes no difference who is “responsible,” the shared duty will result in both partners’ credit histories being badly impacted by late payments. Regardless of changes in relationship status or divorce order, the creditor considers both parties to be liable for the debt until the account is paid in full.

Accounts Individuals

Whether you’re happily married or divorced, you and your spouse may decide to open separate credit accounts. Most creditors will enable you to transfer an account that was previously joint to one of your names if both of you agree. However, if there is a debt on the account, your lender may refuse to remove your spouse’s name unless you can qualify for the same credit on your own. Depending on your financial status, qualifying for financing and credit on a single income may be tough.


While creating the majority of your accounts jointly with your spouse may make it easier to obtain financing (two salaries are preferable to one), reestablishing credit independently following a divorce or separation is not always straightforward. To make matters worse, your spouse may wind up causing significant damage to your credit rating following the separation, either intentionally or through irresponsibility – making the financial situation much more difficult.

Before you rush in and open accounts with your spouse, take some time to discuss the shared responsibility of these accounts and what you and your husband would do in the event of a worst-case situation. These types of financial discussions can be difficult, especially when you rely on items lasting a long time, but a mutual understanding and respect for each other’s credit can go a long way toward keeping your score when sharing an account.

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Credit Cards

Should you pay down debt or save for retirement?



rebuilding credit

While establishing a comprehensive, workable budget is undeniably one of the most important factors in maintaining a healthy financial life, it can also be one of the most difficult. For those who are struggling with personal debt, building a budget can be particularly challenging. When the money coming in has to stretch like a contortionist to cover expenses, it can be hard to determine where to focus — and where to trim.

Sometimes, the battle of the budget can come down to a choice between dealing with the present — and thinking about the future. When your income is running out of stretch, do you pay off your existing debt, or do you start saving for retirement? At the end of the day, the solution to that particular dilemma depends on the type of debt you have and how far you are from retiring.

If you have high-interest debt, pay it down

When considering how to allocate your budget, it’s important to understand the different kinds of debt you may have. Consumer debt can be categorized into two basic types: low-interest debt and high-interest debt, each with its own impact on your credit (and your budget).

In general, low-interest debt consists of long-term or secured loans that carry a single-digit interest rate, such as a mortgage or auto loan. Though no debt is the only real form of good debt, low-interest debt can be useful to carry. For instance, purchasing a home with a low-interest mortgage can actually save you money on housing costs if you do your homework and buy a house well within your price range.

High-interest debt, on the other hand, typically has a hefty double-digit interest rate and shorter loan terms, such as that of a credit card or payday loan. High-interest debt is the most expensive kind of debt to carry from month to month and should always be priority number one when building a budget.

To illustrate why you should focus on high-interest debt above everything else, consider a credit card carrying the average 19% APR and a $10,000 balance. If the balance goes unpaid, that high-interest credit card debt will cost $1,900 a year in interest payments alone. Now, compare that to the stock market’s average annual return of 7%, and it becomes clear that you’ll see significantly more bang for your buck by putting any extra funds into your high-interest debt instead of an investment account.

If you are having trouble paying off your high-interest debt, there may be some steps you can take to make it more manageable. For example, transferring your credit card balances from high-interest cards to ones offering an introductory 0% APR can eliminate interest payments for 12 months or more. While many of the best balance transfer cards won’t charge you an annual fee, they may charge a balance transfer fee, so do your research. You’ll also want to make sure you have a plan to pay off the new card before your introductory period ends.

Most balance transfer offers will require you to have at least fair credit, so if your credit score needs some work, you may not qualify. In this case, refinancing your high-interest debt with a personal loan that has a lower interest rate may be your best bet. Make sure to compare all of the top bad credit loans to find the best interest rate and loan terms.

If you’re nearing retirement, start to save

The closer you get to retirement age, the more important it becomes to ensure you have adequate retirement savings — and the more pressure you may feel to invest every spare penny into your retirement fund. No matter your age, however, paying off your high-interest debt should always remain the priority, as it will always provide the best rate of return (as well as likely provide a credit score boost).

Indeed, no matter how tempting it becomes, you should avoid reallocating money you’ve dedicated to paying off high-interest debt to save for retirement. Instead, the focus should be on re-evaluating your budget to find any additional savings you can. To be successful, you will need to make a strong distinction between want and need — and, perhaps, make some tough lifestyle choices.

Though simply eliminating your daily coffee drink won’t magically provide a solid retirement fund, saving a few bucks by homebrewing while also eliminating a pricey cable bill in favor of an inexpensive streaming service — or, better yet, free library rentals — can add up to big savings over the course of the year. The ideal strategy will involve overhauling every aspect of your lifestyle, combining both large and small cuts to develop a lean budget structured around your long-term goals.

Of course, while you should never allocate debt money to your retirement savings, the reverse is also true. It is almost always a horrible idea to remove money from your retirement account before you hit retirement age — for any reason. Withdrawing early means you will be stuck paying hefty fees for withdrawing money early and, depending on the type of account, you may also have to pay significant taxes.

Aim for both goals by improving income

As you take the necessary steps to pay off debt and save for retirement, you may have already stretched the budget so thin it’s practically transparent. In this case, it is time to consider ways to improve your overall income. Increasing the amount you have coming in not only provides extra savings to put toward your retirement, but may also speed up your journey to becoming debt-free.

The easiest solution may be to look for ways to increase your income through your current job; think about taking on additional shifts or overtime hours to earn some extra cash. Depending on your position — and the time you’ve been with the company — consider asking for a pay raise or promotion, as well.

If you do not have options to make more money at your day job, it may be time to find a second job. Look for opportunities that provide flexible schedules that will accommodate your regular job; many work-from-home positions, for example, can easily fit into most work schedules. Doing neighborhood odd jobs, such as babysitting and dog walking, may also provide a solid income boost without interfering with your existing job.

For some, the need to pay off debt and improve retirement savings can be more than just a source of stress — but a hidden opportunity to begin a new career adventure. Instead of being weighed down by yet more work, use the desire to better your budget as a reason to explore the profit potential of a passion or hobby. Starting a small online store, part-time consulting service, or other small business can be a great way to improve your income and your overall happiness.

While it may sound intimidating, starting a side business can be as simple as putting together a professional looking website and doing a little marketing legwork to spread the word. And no, building a website isn’t as scary — or expensive — as it seems, either. A number of the top website builders now offer simple drag-and-drop interfaces perfect for putting together a professional-looking web page in minutes (without breaking the bank).

Learn how you can start repairing your credit here, and carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

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Credit Cards

How does a loan default affect my credit?



loan default

Nobody takes out a loan expecting to default on it. Despite their best intentions, people sometimes find themselves struggling to pay off their loans. These types of struggles happen for many reasons, including job loss, significant debt, or a medical or personal crisis.

Making late payments or having a loan fall into default can add pressure to other personal struggles. Before finding yourself in a desperate situation, understanding how a loan default can impact your credit is necessary to avoid negative consequences.

30 days late

Missing one payment can further lower your credit score. If you can pay the past due amount plus applicable late fees, you may be able to mitigate the damage to your credit, if you make all other payments as expected.

The trouble starts when you (1) miss a payment, (2) do not pay it at all, and (3) continue to miss subsequent payments. If those actions happen, the loan falls into default.

More than 30 days late

Payments that are more than 30 days past due can trigger increasingly serious consequences:

  • The loan default may appear on your credit reports. It will likely lower your credit score, which most creditors and lenders use to review credit applications.
  • You may receive phone calls and letters from creditors demanding payment.
  • If you still do not pay, the account could be sent to collections. The debt collector seeks payment from you, sometimes using aggressive measures.

Then, the collection account can remain on your credit report for up to seven years. This action can damage your creditworthiness for future loan or credit card applications. Also, it may be a deciding factor when obtaining basic necessities, such as utilities or a mobile phone.

Other ways a default can hurt you

Hurting your credit score is reason enough to avoid a loan default. Some of the other actions creditors can take to collect payment or claim collateral are also quite serious:

  • If you default on a car loan, the creditor can repossess your car.
  • If you default on a mortgage, you could be forced to foreclose on your home.
  • In some cases, you could be sued for payment and have a court judgment entered against you.
  • You could face bankruptcy.

Any of these additional consequences can plague your credit score for years and hinder your efforts to secure your financial future.

How to avoid a loan default

Your options to avoid a loan default depend upon the type of loan you have and the nature of your personal circumstances. For example:

  • For student loans, research deferment or forbearance options. Both options permit you to temporarily stop making payments or pay a lesser amount per month.
  • For a mortgage, ask the lender if a loan modification is available. Changing the loan from an adjustable rate to a fixed rate, or extend the life of the loan so your monthly payments are smaller.

Generally, you can avoid a loan default by exercising common sense: buy only what you need and can afford, keep a steady job that earns enough income to cover your expenses, and keep the rest of your debts low.

Clean up your credit

The hard reality is that defaulting on a loan is unpleasant. It can negatively affect your credit profile for years. Through patience and perseverance, you can repair the damage to your credit and improve your standing over time.

Consulting with a credit repair law firm can help you address these issues and get your credit back on track. At Lexington Law, we offer a free credit report summary and consultation. Call us today at 1-855-255-0139.

You can also carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

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