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What is a Credit Builder Loan and Do They Work?

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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.

Pros

  • 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.

Cons

  • 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

What is purchase APR for credit cards?

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The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

A purchase annual percentage rate (APR) determines the amount of interest that is added to an outstanding credit card balance each month. While the rate is calculated by the year, the interest charge is added monthly to the unpaid balance.

Most credit cards include a purchase APR—annual percentage rate—that is used to calculate the interest on an unpaid credit card balance. 

While APR is an annual percentage rate, credit card interest is actually applied monthly by calculating one-twelfth of the APR. For example, a credit card with an APR of 24 percent would have a 2 percent interest charge added monthly to any outstanding balance. 

Since APR is only applied to outstanding balances, interest charges can be avoided entirely by paying off the full balance of a credit card by the due date each month. 

Read on to learn more about different aspects of APR as well as real-world examples of how APR works. 

Important aspects of credit card APR

Although APR is a straightforward calculation, there are a few important details to consider when looking at a credit card’s APR. Keep in mind that credit cards often have multiple APRs and that APR can change over time. 

Credit cards often have multiple APRs

When discussing APR, most people refer to a credit card’s “purchase APR,” also referred to as “standard purchase APR.” This is the rate that’s applied to regular purchases, including goods and services. 

Different types of APR. Purchase APR, cash advance APR, penalty APR and balance transfer APR.

However, credit cards can do more than just make purchases, so there are several other APRs depending on the activity:

  • Cash advance APR: If you use a credit card to receive a cash advance, you’ll pay interest according to the cash advance APR. Often, the rate for cash advances is higher than normal purchases. Also, interest typically begins to accrue immediately rather than after the due date for the monthly bill. 
  • Balance transfer APR: After you transfer a balance from any line of credit to a credit card, interest will begin to accrue at the rate set by the balance transfer APR. Some credit cards offer a promotional period where transferred balances accrue no interest. 
  • Penalty APR: When your credit card payments are late—typically by more than 60 days—many credit card companies will institute a higher penalty APR, which can affect both the outstanding balance as well as future purchases on the credit card. Penalty APRs can also be activated for other reasons outlined in a cardholder agreement. 

Understanding all of these different kinds of APR makes it easier for you to use credit cards to their fullest while avoiding costly interest payments. 

That said, it’s also important to note that APR is not a permanent number, and it can change over time for a variety of reasons.

APR can change over time

The initial APR for purchases and other activities will be laid out in the cardholder agreement you sign when the card is issued. Typical APR ranges from 15 percent to 22 percent, but cards can have higher or lower APR for a variety of reasons. In any case, the initial APR for your credit card may change over time.

Reasons APR may change over time.

Here’s what you need to know about how and why APR changes over time.

  • Introductory APR: Some credit cards include a lower introductory or promotional APR for a set period of time, usually between three and 24 months after the credit account is opened. After the introductory period ends, a higher APR takes effect. 
  • Variable APR: Some credit cards have a variable APR that is tied to economic factors, like the “prime rate,” which is published by the U.S. Federal Reserve. As this number changes, the APR on your credit card will change as well. 
  • Penalty APR: As noted above, certain actions—like late payments—can lead to a penalty APR that is often significantly higher than the standard APR. The APR often decreases again after six months or more of on-time payments. 
  • Credit score change: If you have a significant change in your credit score, the credit card company may raise or lower your purchase APR accordingly. 

Although APR can change, credit card companies are generally not allowed to change your APR in the first year of your account’s existence. Credit card issuers typically provide notice at least 45 days before increasing a card’s APR. There are a few exceptions to this rule, however, like if your promotional period ends within the first 12 months of your account being opened. 

Let’s take a look at some examples of how purchase APR works. 

Examples of purchase APR

Looking more closely at different purchase APRs makes it clear that interest rates make a big difference when you carry a balance on your credit card.

Example of how purchase APR works.

Let’s imagine that you purchase a $2,500 exercise bike with your credit card and plan to pay off the balance over the next 21 months. 

With a credit card that has a 25 percent APR, you’ll spend $148 each month to pay off the balance for that purchase, and you’ll have paid for more than $600 of interest along the way. 

With a credit card that has a 15 percent APR, your monthly payment will be $136 until the balance is paid off, and you’ll accrue $358 of interest as you make payments.

With a credit card that has a promotional 0 percent APR for 12 months (then a 15 percent APR), your monthly payment will be $122, and you’ll only accrue $66 of interest over the course of the 21 months.

Clearly, different purchase APR can make a big difference when it comes to paying off credit card debt. 

Getting a card with a low APR may depend on a person’s credit history, if you need help managing your credit profile, Lexington Law Firm provides qualified credit repair services. 


Reviewed by Horacio Celaya, Associate Attorney at Lexington Law Firm. Written by Lexington Law.

Horacio Celaya was born in Tucson, Arizona but eventually moved with his family to Mexicali, Baja California, Mexico. Mr. Celaya went on to graduate with Honors from the Autonomous University of Baja California Law School. Mr. Celaya is a graduate of the University of Arizona where he graduated from James E. Rogers College of Law. During law school, Mr. Celaya received his certificate in International Trade Law, completing his thesis on United States foreign direct investment in Latin America. Since graduating from law school, Mr. Celaya has worked in an immigration firm where he helped foreign investors organize their assets in order to apply for investment-based visas. He also has extensive experience in debt settlement negotiations on behalf of clients looking to achieve debt relief. Mr. Celaya is licensed to practice law in New Mexico. He is located in the Phoenix office. 

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

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3 ways to remove a closed account from your credit report

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The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

You can remove closed accounts from your credit report in three main ways: dispute any inaccuracies, write a formal “goodwill letter” requesting removal or simply wait for the closed accounts to be removed over time. That said, removing closed accounts can affect your credit score, so make sure you consider your situation first.

While it’s not always possible to remove a closed account from your credit report, it is straightforward to attempt to do so. However, it’s not always beneficial to remove closed accounts, and in some cases, it could even lower your credit score.

In general, you should try to remove a closed account with inaccurate negative information, but you should probably leave any accounts that are yours that are having a positive effect on your credit history.

Below, we’ll talk about whether you should try to remove closed accounts from your credit report, how closed accounts may affect your credit score and how to remove closed accounts. 

Should you remove closed accounts from your credit report?

You should attempt to remove closed accounts that contain inaccurate information or negative items that are eligible for removal. Otherwise, there is generally no need to remove closed accounts from your credit report. Inaccurate information could be pulling down your credit score and should be addressed, but older accounts with a good history may be helping your score. 

Even after closing an account—like a personal loan or credit card—the information related to your balances and payment history stays on your credit report for many years. In fact, both accounts closed in good standing and negative items or collection accounts may remain on your credit report for seven to 10 years. 

Deciding whether to try to remove a closed account ultimately comes down to understanding the factors that affect your credit score.

Deciding whether to remove closed accounts. Try to remove close accounts if they are: inaccurate, negative, fraudulent. You can leave closed accounts if they are: in good standing, helpful for credit utilization, beneficial for credit history.

Your credit score is calculated based on five main factors: payment history (35 percent), credit utilization (30 percent), length of credit history (15 percent), different types of credit (10 percent) and new credit (10 percent). 

Because a credit report includes both open and closed accounts, some of these credit factors can be affected by a closed account being removed from your report. For example, if you made payments on a personal loan for a number of years and that account is removed from your report, your length of credit history could decrease.

Having a closed account removed from your report may not affect your score, but in many cases, it is wise to leave accounts in good standing on your report, as they could have a positive impact overall. 

However, closed accounts with negative items eligible for removal and inaccurate information can lead to a lower score, so working to get those accounts removed is part of a sound credit repair strategy. 

Read on to learn how to get rid of closed accounts from your credit report.

How to remove closed accounts from your credit report

If you need to attempt to remove a closed account from your credit report—especially one that includes inaccurate information or negative items—there are three ways to do so. You can either dispute inaccurate information with the credit bureaus, write a formal “goodwill letter” to request removal or simply wait until the account is removed after a period of time. Each of these approaches can be useful depending on your particular situation.

Three ways to remove a closed account from your credit report: dispute inaccurate information, wait for the account to drop off your report, write a "goodwill letter."

Read on to learn more about when to try each of these different methods for getting a closed account off your credit report.

1. Dispute inaccurate information

If a closed account on your credit report includes inaccurate information, you can dispute the information and potentially get the item removed from your report. 

You can dispute the information using the following process:

  1. Send a letter to the three major credit bureaus—TransUnion®, Experian® and Equifax®—that explains what information you are challenging, why you believe it is inaccurate and that you would like it removed.
  2. Similarly, send a letter to the financial institution that provided the information to the bureaus.
  3. Wait for responses, then look at your updated report and score.

We have a guide that details the dispute process to help you along the way. 

2. Write a “goodwill” letter

A goodwill letter is a formal request to a creditor asking for a negative item to be removed. 

Although creditors are not required to remove negative items upon request, they may be willing to do so if you have a long history with them or if there were special hardships that led to the negative item. 

However, goodwill letters are generally useful only for late or missed payments rather than collections, repossessions or other more significant negative items.

In addition to goodwill letters, you can also request that an account is removed using a “pay for delete” letter. These letters can lead to an agreement with a collection agency to remove an account in exchange for a set payment. That said, the collection agency may decide not to remove the account, and the original account that went to collections may remain on your report. 

3. Wait for the closed account to be removed over time

Closed accounts do not stay on your report forever, so it’s possible to simply wait it out until a closed account is removed.

Accounts that were closed can remain on a credit report for around seven to 10 years. 

When an older closed account with negative information is potentially lowering your score, eventually it will drop off your report. Additionally, positive information about closed accounts also leaves your report over time, so it’s important to continue to practice good credit habits with a variety of account types.

If your credit report contains closed accounts with negative items or inaccurate information, the team at Lexington Law Firm can assist you with credit repair. By analyzing your credit report and assisting with disputes, our team can help you make strides in improving your credit score.


Reviewed by Kenton Arbon, an Associate Attorney at Lexington Law Firm. Written by Lexington Law.

Kenton Arbon is an Associate Attorney in the Arizona office. Mr. Arbon was born in Bakersfield, California, and grew up in the Northwest. He earned his B.A. in Business Administration, Human Resources Management, while working as an Oregon State Trooper. His interest in the law lead him to relocate to Arizona, attend law school, and graduate from Arizona State College of Law in 2017. Since graduating from law school, Mr. Arbon has worked in multiple compliance domains including anti-money laundering, Medicare Part D, contracts, and debt negotiation. Mr. Arbon is licensed to practice law in Arizona. He is located in the Phoenix office.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

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Do debt consolidation loans hurt your credit?

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The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

When done correctly, debt consolidation loans usually do not hurt your credit long-term. In fact, there’s a good chance that they will ultimately improve your credit. However, debt consolidation can initially knock your score down a bit, which is why it’s important to do your due diligence before pursuing this strategy.

Debt consolidation is a way to combine multiple debts into a single loan. This not only reduces the interest you owe, but it also helps you organize your debt, making payments more manageable.

Debt consolidation can have positive and negative effects on your credit score. Here are a few areas it may negatively impact:

  • Credit applications: Applying for a personal loan or a balance transfer card requires that a hard inquiry be performed on your credit. This will likely lower your score a bit initially as you get the consolidation process started.
  • Average age of credit: The ages of your credit accounts matter, with older accounts garnering better credit scores. When you open a new account, it lowers your average credit age, which may initially negatively impact your score.

On the other hand, the following categories tend to be positively impacted by debt consolidation:

  • Credit utilization: A new debt consolidation account will usually increase the amount of available credit you have. As long as you don’t begin spending significantly more after opening the new account, you’ll be using less of your available credit, which will benefit your score.
  • Payment history: If you consistently pay off your new loan on time, your credit will likely be positively impacted.

Effects on credit score depend on the debt consolidation method

Each debt consolidation method comes with its own benefits and drawbacks. It’s important to acquaint yourself with the potential impacts of each method to make sure that consolidating debt results in a net gain for your credit health.

Balance transfer

A balance transfer is the process of transferring debt to a single credit card with a lower interest rate, allowing you to pay off your debts for less. Many balance transfer cards offer zero-percent APR during an introductory period, providing a window to pay off debt interest-free.

Despite the benefits offered, a balance transfer card could damage your credit score. First, applying for a new credit card may warrant a hard inquiry, which can bump your score down a bit. Second, your credit score is partially determined by credit utilization, and transferring significant amounts of money to a card and then paying it off involves high credit utilization on that card. This will likely harm your score.

If you decide to pursue a balance transfer card to pay off debt, be sure to investigate the card’s APR following the introductory period. Your interest rate may take you by surprise and skyrocket if you don’t do your due diligence.

The average length of a 0% APR introductory period is around 12 months for balance transfers. Source: WalletHub

Personal loan

Another popular debt consolidation method is taking out a personal line of credit. These loans are available at any time and can be used to quickly pay off debt.

If used correctly, personal loans can improve your credit score by diversifying your credit mix, especially if you’ve only had credit cards up until this point. Paying off debt with a loan rather than with credit can also reduce your credit utilization, which may boost your score.

That said, it’s important to remember that this process involves taking out a loan that must be paid back on time. You may also want to reconsider this option if your present score doesn’t allow you to take out a personal loan without being charged a high interest rate.

Borrowing from a 401(k)

If you have a 401(k) retirement account, you can borrow up to half of this balance to pay off debt. While it must be paid back within five years to avoid penalties, borrowing from a 401(k) does not have any adverse effects on your credit score. Moreover, the money you borrow doesn’t accumulate interest since 401(k) funds aren’t borrowed from a lender.

However, it’s important to remember what a 401(k) is meant for—retirement. Taking out funds for short-term debt payments can significantly detract from your retirement savings. You may also have to deal with tax repercussions when taking this course of action.

Nearly one-third of Americans with retirement accounts have borrowed from those accounts in the form of a loan. Source: SHRM

Home equity loan or line of credit

Home equity loans or lines of credit are perhaps the riskiest forms of debt consolidation, but they also offer some significant benefits. Essentially, lenders will offer you a loan and use your home as collateral. This means that if you fail to pay off the loan within the amount of time agreed upon, you could lose your home.

You must have excellent credit to take out a home equity loan or line of credit. When you apply, you will be hit with a credit check, which could initially lower your score a bit. While the impact on your score will likely be relatively insignificant, these loans can also accumulate very high interest, so it’s important to use discretion before taking one out to pay off debt.

Other options to consider

If debt consolidation doesn’t feel right for you, that’s okay. There are other debt relief options that could help restore your peace of mind regarding your financial situation.

Debt management program

Debt management services can help by counseling you regarding your options when you’re struggling with debt. A debt management program will likely involve a counselor negotiating lower interest with creditors and potentially closing credit cards.

While visiting a counselor at a debt management agency doesn’t harm your credit score at all, entering into a debt management program that reduces how much you have to pay does usually negatively impact your score. Your credit report will likely reflect the debt management program in effect until you are no longer using it.

Debt settlement or bankruptcy

Debt settlement is the process of negotiating with creditors to pay significantly less money than you owe to have your debt forgiven. Bankruptcy is a legal process that helps people organize and sometimes eliminate their debt. Bankruptcy, however, is a more long-term option than the other ones we’ve mentioned.

These two options should be a last resort when struggling to pay off debt, as they can have a significantly adverse effect on your credit score. Both debt settlement and bankruptcy will remain on your credit report for upwards of seven years, and sometimes up to ten years, negatively impacting your ability to open new accounts or apply for a loan. However, if you need to take care of massive debt now and you take wise financial steps in the future, these processes could end up ultimately being the right solution for you.

Should I consolidate my debt?

Before pursuing debt consolidation, it’s important to take a comprehensive look at the reasons you’re interested in consolidating debt and your plans for the foreseeable future.

Do you have a high interest rate?

If the interest on the debt you owe is 20 percent or more, you’ll likely save money by consolidating debt. However, certain balance transfer options charge fees that may counteract the benefits of debt consolidation. Do your research ahead of time to figure out which option saves you more money.

Are you missing payments?

Keeping track of all of your accounts can be stressful. If remembering to pay your bills has been a struggle and you’ve found yourself repeatedly missing payments, debt consolidation may help. Consolidating your debt could simplify your financial life by allowing you to take care of all payments at once. This will also benefit your credit in the long run, since missed and late payments can be detrimental to your score.

Do you need excellent credit in the short term?

If you’re planning to take out a loan or a mortgage anytime soon, you may feel the need to safeguard your credit score at all costs. Since many debt consolidation methods will put a temporary dent in your score, it may be wise to hold off until after you’ve been approved by a lender.

Ultimately, whether you decide to pursue debt consolidation and which method you choose depends on the weight of your debts and what would benefit your credit most. If you’re still on the fence, it’s a good idea to consult a financial advisor before making any decisions that could have long-lasting consequences.

Whichever decision you make, remember to keep your credit health at the forefront of your mind, and to take the steps where needed to repair your credit to expand your financial opportunities.


Reviewed by Cynthia Thaxton, Chief Compliance Officer. Written by Lexington Law.

Cynthia Thaxton has been with Lexington Law Firm since 2014. She attended The College of William and Mary in Williamsburg, Virginia where she graduated summa cum laude with a degree in International Relations and a minor in Arabic. Cynthia then attended law school at George Mason University School of Law, where she served as Senior Articles Editor of the George Mason Law Review and graduated cum laude. Cynthia is licensed to practice law in Utah, North Carolina and Virginia.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

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