Credit Builder Loans for Students

Key Takeaways

  1. Equifax, Experian, and TransUnion track your credit. They shape scores used by places like VantageScore and FICO.
  2. Your credit score, between 300-850, impacts borrowing, renting, and job chances.
  3. These loans let you build credit. You don't get the cash straight away; it's saved till you repay the loan, helping build a good credit story.
  4. Paying on time is a must. Set up auto-pay and plan your budget to stay on track.
  5. Besides these loans, students can use student cards, jump onto their parent's card, or get a trusted person to back them up on loan or rental applications.
Credit Builder Loans for Students

I. Introduction

Your credit score is important for many reasons. If you don’t have good credit, it’s tough to get an auto loan or a mortgage and it can even be difficult to rent an apartment. A big aspect of your credit score is your credit history. Lenders want to see that you pay your bills on time and that you’ve done so over an extended period. This is often a problem for students and recent graduates.

When you’re just starting out in the financial world, you may not have a long credit history. You may have no credit history at all. That makes it difficult to get loans, so you’ll have trouble buying a car, a home, or paying for many of the other large expenses you’ll be faced with over the next few years. Even if you can get a loan, you’ll likely pay significantly higher interest rates which will make life much less affordable.

Many young people just out of school are unsure of where to start to resolve these issues. If you can’t get a loan, you can’t show that you can pay it back on time. If you can’t show that you can pay a loan back, you’ll have trouble getting a loan at all. One way to break this cycle is to use a credit builder loan for students.

A credit builder loan is designed for anyone who either has no credit history or has bad credit. With a credit builder loan, you don’t get the money from the loan right away. Instead, you make regular monthly payments over time until you have paid off the total loan amount plus interest. Once you’ve done that, you can access the funds from the loan. Because of this process, credit builder loans are very low risk for lenders. That’s why you’ll be able to get one even if you have poor or no credit. By making the monthly loan payments on time, you’ll improve your credit score.


II. Understanding Credit

There are three major credit bureaus in the United States: Equifax, Experian, and TransUnion. They collect credit information on individual consumers and use this information to compile credit reports. These reports include the type and amount of credit you have, your payment history, and your credit application history. The information in your credit report is used to calculate your credit score.

The two major credit-scoring companies are VantageScore and FICO. Credit scores range from 300 to 850, and higher scores are better. When you apply for a loan, the lender will probably check your credit report and/or credit score. They want to understand more about your credit history to determine the risk of lending to you. Those with better credit are considered less of a risk, so they’ll have an easier time getting loans and they’ll receive the lowest interest rates. Those with poor credit or no credit history will have trouble getting loans and they’ll pay higher interest costs on the loans they can get.

Your credit score affects more than just your ability to borrow money. For instance, many landlords check a person’s credit before agreeing to rent a property. This means, if you have poor credit, you’ll have a tougher time renting a home. Similarly, many employers won’t hire candidates with poor credit, although they are more understanding about recent graduates having a short or no credit history.

All of these potential negatives can make it difficult for students and young grads to advance their lives and achieve many of life’s milestones.

III. The Importance of Credit for Students

Students need to care about their credit score for many reasons, then. In addition to making it difficult to get loans and other financial products, a bad credit score can make it hard to rent a home and many jobs require good credit as well. If you’re about to graduate or if you’re just out of school, you don’t want to limit your career options by having poor credit.

Your credit history is one of the most important factors used to calculate your credit score. If you don’t have a long history of using credit and paying your bills on time, your credit score will be lower. That means it’s important to start good credit habits early, so you have a relatively long history of good credit when it’s time to buy a car, a house, or apply for a personal loan. The sooner you start to build your credit history, the more prepared you will be for when the time comes. Developing healthy credit habits when you’re young provides you with a strong foundation for your financial life.


IV. Introduction to Credit Builder Loans

A credit builder loan is different from most traditional loans since you can’t access the money right away. With most loans, you can get the full amount of the loan immediately, and then make regular monthly payments. With a credit builder loan, the loan amount is placed into a savings account or certificate of deposit account. You then make your regular monthly payments until you have paid off the loan in full, including interest. Only when you’ve paid it in full do you receive the money.

The reason behind credit builder loans for students is that they allow you to establish a credit history. As you make your monthly payments on time, each of these payments is reported by the lender to the credit bureaus. This reflects positively on your credit score.

V. Advantages of Credit Builder Loans for Students

The main advantage of credit builder loans for students is that they are accessible to those who do not have a lengthy (or any) credit history, as well as for students who have poor credit.

It’s very difficult to gain access to credit when you are just starting out. If you’re a recent graduate or a current student and you’re looking to rent an apartment, buy a car, get insurance, sign up for a cell phone plan, refinance your student loans with a private lender, or perform many other financial tasks, you’ll have difficulty doing so if you don’t have a good credit history.

So, the sooner you start building credit, the better. The length of your credit history matters. Displaying responsible credit habits over a long period shows lenders that you can be trusted and this makes it much more likely that they’ll give you the loan you’re looking for.

In addition to building your credit history and improving your credit score, a credit builder loan can also be a good introduction to the importance of paying bills on time. Many students don’t have significant experience with making regular payments on a loan, so a credit builder loan can be a good way to establish this habit.

It also reinforces the importance of a good credit score, which is necessary throughout your life and something a lot of people don’t realize.


VI. Choosing and Applying for a Credit Builder Loan

Many banks, credit unions, and online lenders offer credit builder loans for students. When you’re looking at the different loans, it’s important to consider their interest rates, loan terms, and other differences including administration and processing fees, and penalties for early payment. Choose a loan that you can afford to pay back each month, that helps you meet your credit-building goals, and that makes sense for you financially. Not all loans are created equal, so it’s important to understand all the terms and aspects of the loan before you agree to it.

There is usually no minimum credit score required to get a credit builder loan, so they’re the perfect option for students and recent graduates who often have no credit history or poor credit. However, you may be asked to prove your income and employment details so the lender knows that you have the ability to make the loan payments.


VII. Tips for Using a Credit Builder Loan Responsibly

One of the most important aspects of credit builder loans for students to recognize is that your monthly payments must be made on time for you to improve your credit score. If you don’t make those payments when they are due, this will negatively affect your credit rating. Since the goal of getting a credit builder loan is to improve your credit, you are defeating the purpose of the loan if you don’t pay on time.

To ensure that you never make a late payment, it’s often recommended to schedule automatic payments with your financial institution. This can usually be done online. Remember that you still need to make sure that you have enough money in your account to cover the payments when they’re set to come out. Otherwise, you will probably be hit with a late payment fee or penalty. You also risk the payment not going through and being reported for late or not-payment to the credit bureaus.

Budgeting and financial management are crucial skills to ensure you always have enough to pay your bills when they are due. Create a budget by looking at your monthly costs and make sure that you spend less each month than you earn. If you can’t afford all your expenses with your monthly income, you’ll probably have to make cuts. Start by cutting variable expenses, such as entertainment, clothing, and travel until it balances. Once you have a budget that works for you, track your spending to keep you on target.

When you start making payments on a credit builder loan, you’ll want to monitor your credit score to see how it improves. It won’t change overnight, but if you make your monthly payments when they’re due, your credit score should improve over time. There are several services that allow you to monitor your credit score. Both paid and free options are available, and each service has different features. Comparing these features will help you choose the one that’s right for you.

VIII. Alternatives to Credit Builder Loans

Credit builder loans are not the only options for students who wish to improve their credit score. Another option is student credit cards. These are relatively similar to traditional credit cards, but they are usually limited to people of a certain age (typically those under the age of 25). Some cards require you to provide proof that you are enrolled in school to qualify.

These cards typically have lower credit limits than traditional credit cards, but they often have more relaxed qualification requirements. This makes it easier for students (who usually have inconsistent income and poor or no credit) to get approved.

Still, they function just like every other credit card. In other words, you need to make sure that you don’t overspend, that you pay your bills on time, and that you avoid making purchases that you cannot afford to pay for.

Another option to building a credit history is to become an authorized user on your parent's credit card. When you are an authorized user, you are added to another person’s account and are able to make credit card purchases as if the card was your own. However, the primary cardholder is responsible for making the payments. If the card provider reports authorized users to the credit bureaus, this process helps you improve your credit score.

If you are unable to get a loan or an apartment due to a poor credit score, you may want to have a parent or someone else who has good credit cosign the application. When someone else cosigns, they become equally responsible for the payments. This means that if you can’t make the payments, they are required to do so.


IX. Conclusion

Credit builder loans help students establish their credit history. How often you make payments on time and how long you have been doing so are significant factors when it comes to calculating your credit score. Students and recent graduates, who are often just starting out in the financial world, tend to have shorter credit histories and many have poor credit scores or no credit at all.

Since you only receive the money after you’ve made all the loan payments, credit builder loans are less risky for lenders. Therefore, it’s easier to get these loans compared to most traditional loans. This is helpful for people who have poor credit and would otherwise be unable to get a loan.

By making on-time payments, students can use credit builder loans to build their credit history and improve their credit score, helping set themselves up for financial success going forward. This makes credit builder loans a valuable tool and one that can start you on a strong financial path as you leave school.

If you’re a student or recent graduate and are looking to start building your credit history, read our credit builder loan review or go directly to a credit builder loan provider.

About The Author

Author Avatar

Bryan Huynh

Product Tester & Writer

Bryan Huynh, a committed Product Tester and Writer, ensures that you are well-informed, guiding you in discovering and comparing top-rated financial services, including personal loans, business loans, credit repair, and tax relief.

Articles Related to Credit Builder Loans