Did you know you can borrow money and use your loan to help you improve your credit score? That’s what the credit builder loan is all about. If you’re in need of a little extra cash and need to give your credit score a boost, then a credit builder loan may be something worth looking into.
Key Things You Should Know About Credit Builder Loans
- Credit builder loans can be a great tool for people with bad or no credit to build their credit scores.
- Unlike a regular loan, a credit builder loan does not provide cash upfront. Payments made are reported to the credit bureaus, which can help you build good credit.
What Is A Credit Builder Loan?
A credit builder loan is a financial tool designed to help individuals build or improve their credit scores. Rather than receiving the money upfront, you’ll make payments to your “lender” who will hold the funds in an account, usually a savings account or certificate of deposit (CD).
You’ll make payments according to the terms of the contract. Once you pay off the “loan”, your lender will give you back the money minus the interest and fees. Like a regular loan, payments will be reported to the credit bureau(s) to help you build a positive payment history.
In this way, a credit builder loan not only helps you build credit but saves money too.
Best Credit Builder Loan Programs In Canada
| Borrowell Credit Building | Learn More |
| Climb Accelerator Plan | Learn More |
| Spring Financial – The Foundation | Learn More |
Borrowell Credit Building
With Borrowell’s credit-building program, you make payments for 36 months, then get your savings back by the end of the term. Your payments are reported to Equifax, which can build good credit.
Climb Accelerator Plan
With the Climb Accelerator Plan, you set a savings goal and timeline, then make pre-authorized payments towards the loan. The money you pay is saved on your behalf in a secure account. Your payments are reported to TransUnion and Equifax, and at the end of the term, you get your saved money back.
Spring Financial – The Foundation
Spring Financial’s The Foundation program sets up a tradeline on your credit file and reports your payments to the credit bureaus. Part of each payment is automatically saved for you. Making timely payments helps improve your credit score.
Other Credit Builder Programs In Canada
Several providers in Canada offer credit builder loan products:
| Product | Description |
| KOHO Credit Builder | The KOHO Credit Builder Loan involves a line of credit, which is separate from your regular KOHO account. Every month, a certain amount is set aside from your credit line and is reported as an on-time payment to Equifax. |
| Chexy | Chexy is great for those who want to build their credit through rent payments and credit cards. Chexy will report your rent payments to Equifax to help you improve your credit profile. Chexy also helps facilitate rent payments via credit card payments, which is another way to build good credit. |
What Are The Eligibility Requirements For A Credit Builder Loan?
Most credit building loans don’t require credit checks and have very few requirements. So long as you can provide proof that you can make the credit building loan payments, you should be able to qualify. Lenders may also check your bank statements to assess your debt-to-income ratio as that can hinder your ability to make payments.
In general, you can expect to provide the following documentation:
- Personal Details. Personal documents such as a government-issued photo ID, plus proof of address will be required.
- Bank Details. Your lender will usually also want your bank statements to assess your basic finances. A void cheque may also be required for loan payment purposes.
- Employment Verification. Pay stubs, an employment letter and tax documents such as a T4 may also be requested in order to verify your income and employment stability.
How Does A Credit Builder Loan Repair Credit?
Credit builder loans repair credit by establishing credit payment history and providing an opportunity for you to develop responsible financial habits. Here’s how a credit builder loan works to build good credit:
- Make Regular Payments: Making on-time monthly payments on a consistent basis that are reported to the credit bureaus is perhaps the best way to build a positive credit profile.
- Length Of Credit History: While a credit builder loan may have a shorter term compared to other credit types, it still contributes to your overall credit length, which can have a positive impact on your credit health.
How Fast Will My Credit Score Improve?
A credit builder can help build your credit; however, the time it takes depends on a variety of factors, including the following:
- Your current credit score
- What you want your credit score to be
- Your efforts to improve your score
- A history of negative remarks on your credit report
Having said that, you could see your credit score improve as soon as 30 to 45 days after your first step to positively affect your credit score. However, it can take months to see notable improvements to your credit score, so the key is to be patient and consistent in your efforts.
Benefits Of A Credit Builder Loan
There are several perks of taking out a credit builder loan for the purposes of improving or establishing a positive credit profile:
- Affordable. Credit building loan programs typically involve relatively small amounts, so your monthly payments are usually small and affordable. As such, you may find that you won’t have to make any significant changes to your budget.
- Save Money. Every payment you make is saved in an account on your behalf, minus any applicable fees. By the end of the term, you’ll have saved a certain amount of money, which you can use for a variety of purposes.
- Build Good Credit. As long as you make your payments on time every billing cycle, you should eventually build good credit over time.
- High Approval Rate. The requirements for a credit builder loan are quite lax. Most notably, you’ll likely not require a credit check. So, you may have a relatively easy time getting approved as long as you have a sufficient income to cover repayments.
Drawbacks Of A Credit Builder Loan
Along with the benefits of credit builder loans are some potential downsides to consider:
- Waiting For Your Money. With a credit building loan program, you only get the money you’re borrowing after you’ve paid it off. If you need the money right away, this may not be the right option for you. Instead, you may want to consider a traditional loan that provides borrowed funds upfront.
- Interest and Fees. All loans and forms of credit have interest rates and fees. So, you’ll need to budget for this additional cost.
How Much Does A Credit Builder Loan Cost?
Before taking out a credit builder loan, be sure to budget for the following costs.
- Interest. Like a regular loan, the interest rate on a credit builder loan is important to consider. The higher it is, the lower you’ll likely get back.
- Fees. Often, credit builder loans will have set-up or administrative fees. There may also be monthly membership fees, as is the case with KOHO, for instance.
- Monthly Payment. You’ll need to make monthly payments to the Be sure to ask your lender how much you’ll need to pay per month. This will give you a better idea of how much the loan will cost you on a monthly basis, which can help with budgeting.
Who Can Benefit From A Credit Builder Loan?
Credit builder loans can be suitable for the following:
- Newcomers To Canada: Those who are new to Canada cannot take their credit score from their home country. They must start from scratch to build credit in Canada.
- New Credit Users: Individuals who have never applied for a credit product before and are looking to establish a credit history may find credit builder loans useful.
- Bad Credit Borrowers: Those with bad credit who need to rebuild and improve their credit score should use a tool like a credit builder loan to make timely payments and build good credit.
- Students And Young Adults: Those who are just starting to build their credit may find it tough to get approved for traditional credit products. In this case, a credit builder loan may be more accessible.
How Do People Use The Money From Their Credit Builder Loan?
At the end of your loan term, you’ll have saved up a considerable amount of money. The funds can be used for a variety of purposes, including the following:
- For unexpected expenses
- To build an emergency fund
- To pay off debt
- To put a down payment on a house
- To pay for school or to pay off student loans
- For retirement
- To pay for a vacation
- To make a down payment on a car
- To cover car repairs
How Does A Credit Builder Loan Differ From A Regular Personal Loan?
There are notable differences between a credit builder loan versus a personal loan:
| Credit Builder Loan | Personal Loan | |
| Purpose | Build good credit | Access borrowed funds |
| When Funds Are Provided | At the end of the loan term | Upfront |
| Loan Amounts | Typically smaller, anywhere from around $300 to $1,000 or more | Typically higher, anywhere from $500 to $35,000 |
| Loan Terms | Typically shorter, anywhere from 6 to 24 months | Typically longer, up to 5 years & possibly longer |
| Interest Rates | Generally lower | Varies based on credit score and income |
Other Ways To Build Good Credit
While credit builder loans provide a great opportunity for those with bad credit or no credit to establish a positive credit profile, there are other options to consider:
Secured Credit Cards
A secured credit card is a type of credit card that allows you to use it like a regular credit card, except that you’re not spending on credit. Instead, you’re required to make a deposit upfront, which acts as collateral and your credit limit.
You use the card like a regular card, making purchases and repaying the balance every month. Your payments are reported to the credit bureaus, which can help you improve your credit score.
Use A Co-Signer
A co-signer on a loan is someone who agrees to assume the responsibility of making loan repayments if the primary borrower fails to do so. Basically, the co-signer serves as a backup for the loan, which reduces the lender’s risk. As such, the lender may be more willing to approve your loan application.
As your payments are made on time every month, they’ll be reported to the credit bureaus, helping you build good credit.
Become An Authorized User
An authorized user on a credit card is someone who is added to the primary cardholder’s account. This allows the authorized user to use the credit card for purchases, without being legally obligated to make payments. The authorized user can benefit from the primary cardholder’s positive credit history, which can help improve the authorized user’s credit score.
Bottom Line
Rebuilding your credit score takes time and patience. In some cases, you may want to make use of financial tools to help in this endeavour, like credit builder loans. These tools can also help you save money. They’re easy to qualify for and can be a great addition to your overall strategy to improve your credit profile.
