Credit-building products can be helpful for those who are just beginning their personal finance journey or who have faced difficulties. These products can help borrowers build a more solid and positive credit history. However, they may limit loan amounts and have higher interest rates. Research your options in advance to make the best decision.
What are credit building products?
Credit-building products are loans, services, or apps that help consumers understand and improve or develop their credit score.
Credit-building loan products are designed to give borrowers who don’t qualify for traditional loans an opportunity to prove their creditworthiness with flexible qualification requirements. They are usually more restrictive than other types of credit, with relatively low borrowing limits and sometimes requiring collateral. That said, these products can be a great starting point for some borrowers.
Credit building apps offer educational articles, credit monitoring services, and other content aimed at helping you make good credit decisions by teaching you the fundamentals of credit score building.
Types of credit-building products
There are a variety of credit-building products on the market. Some may be better suited than others, and you should consider the terms, fees and interest rates when choosing which product to use.
Common types of credit building products include:
- Credit Builder Loans.
- Small loans.
- Secured credit card.
- Credit building app.
How much do credit building products cost?
Each type of credit-building product can have a cost. Credit-building loans usually have interest rates and fees. However, the APR and costs are much lower than other no-credit loans, such as payday loans or auto secured loans.
There are many online credit monitoring services and tools available. Some charge a monthly fee depending on how often and for how long you track your credit score. Most services allow you to cancel at any time, and some offer a free trial period.
The cost of these credit-building products may be worth it if they help you build a good credit score and good credit habits.
The pros and cons of each credit-building product
There are many different ways to build credit, and knowing the pros and cons of each credit-building product can help you focus on the products that will give you a strong foundation for getting the best terms for your future credit.
Small Loans
Six national banks offer small loans as a low-cost alternative to payday loans. Small loans are easier to qualify for than personal loans and are heavily regulated by consumer protection laws. Annual interest rates cannot exceed 36% and must be paid in equal installments. You can’t borrow more than $2,500, although many small loan providers have a low limit of $1,000.
You can get a small loan by contacting a local bank or credit union or a national bank that offers small loans.
Strong Points
- More flexible qualification requirements than traditional loan products.
- Much lower APR than payday loans.
- The payment will be reported to at least one credit bureau.
Cons
- You cannot borrow more than $2,500.
- Not available in all states.
- They can be harder to qualify for than payday loans.
Credit Building Loans
Credit builder loans are typically loan amounts between $300 and $1,000 and are aimed at borrowers with little or no credit history. Unlike a regular loan, you don’t receive credit up front. Instead, you make payments over a period of time and receive funds as you repay or complete your payment schedule (usually 12 to 36 months).
Strong Points
- Each payment is reported to the credit bureaus and can help improve your score over time.
- Borrowers without an established credit history may also qualify.
- You can choose a smaller loan amount to keep your payments affordable.
Cons
- You will not receive any funds upfront.
- If you need cash for living expenses or emergencies, it’s not a good option.
- Ongoing charges may apply.
Secured Credit Cards
A secured credit card is exactly what the name suggests: a credit card that is secured by putting up cash with a lender. Since you put up the amount of money you want to borrow, it’s usually easy to qualify for. As long as you make your payments on time, it can help boost your credit score. Some lenders might even offer you an unsecured credit card if you prove you can manage your finances with a secured credit card.
When Bankrate’s personal loan editor, Pippin Wilbers, wanted to start building credit in her early 20s, she opted for a secured credit card through her credit union.
“I had some savings but no credit history, so I wanted to make sure I would qualify to rent an apartment,” he explains.
He started using his cards for small everyday purchases like groceries and quickly paid off the balance, which helped him keep his credit utilization low and avoid paying interest. This approach helped him build a score in the 700s, even with no other credit products in his portfolio.
Strong Points
- You may not need a credit score to qualify.
- Regularly making on-time payments can help improve your credit score.
- Keeping your balances low will improve the credit utilization portion of your credit score.
Cons
- An upfront cash deposit equal to the amount of credit you are applying for is required.
- Maxing out your credit card balances can lower your score.
- They have higher APRs and costs than most unsecured credit cards.
Credit Building Apps
Credit building apps help you track and improve your credit score through educational resources, financial tracking tools, and lending options.
Most apps organize and streamline the application and repayment process for other credit-building products, and some can help you monitor and manage your score on a daily, weekly, or monthly basis.
Strong Points
- Easily track your payments and balances on your Credit Builder Loan product right on your smartphone.
- Most banks offer tools and educational resources to help you maintain good credit.
- Several apps can help you track the fluctuations in your credit score.
Cons
- Requires a working smartphone.
- The app may have confusing features or may not work as advertised.
Bankrate Tips
Experian Boost is a credit-building app backed by the credit reporting company of the same name. The free program helps participants build a good credit history by tracking timely recurring payments for things like streaming subscriptions and utility bills.
What’s the best way to build credit?
The best way to build credit is to pay your bills on time and use borrowing as a last resort.
Keep your credit card balances low or pay them off every month. Avoid applying for multiple credit card accounts at once and check your credit report for errors at least once a year. Build some room in your budget for emergency savings so you don’t have to go into debt when unexpected expenses come up.
Always compare multiple lenders to ensure you get the best interest rate at the lowest cost. For installment loans such as personal loans or car loans, carefully choose whether to go for a longer term to keep your payments low or a shorter term to pay off your balance faster.
Regardless of the method you choose, improving your credit profile will make it easier to access credit in the future. Even graduating from a bad or thin credit profile can help you get a fair credit loan interest rate and save you hundreds of dollars compared to having a bad credit profile.
Other ways to build credit
There are a few other easy ways to help build credit.
- Consider a co-signer. To improve your chances of getting a loan and boost your credit score, you may be able to add a family member or friend as a co-signer on your application. They will be responsible if you can’t repay the loan, so discuss the decision in advance and let them know if you’re having trouble paying.
- Check out alternative credit reporting offers. Some credit providers offer services to add payments for everyday expenses to your credit history. For example, Experian Boost adds your utility and subscription service payment history to your credit history, helping to improve your credit score.
- Become an authorized user. Parents often add their teen or college-aged children to their credit cards in an effort to establish a credit score. Make sure you understand the rules regarding card usage to avoid any surprises that could plummet your (or your parent’s) credit score.
Conclusion
Credit-building products offer different ways to build and improve your credit score. If used wisely, they can help you qualify for larger loans, like mortgages and car loans, in the future. Be sure to research your options and read the fine print. Shop around for the interest rates and terms that are most favorable for you.
