Credit-Builder Loans Are Not The Ideal Solution To Your Savings Dilemma Bankrate Caret RightMain Menu Mortgage Mortgages Financing a home purchase Refinancing your existing loan Finding the right lender Additional Resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Bank Banking Compare Accounts Use calculators Get advice Bank reviews Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Credit Card Credit cards Compare by category Compare by credit needed Compare by issuer Get advice Looking for the perfect credit card? Narrow your search with CardMatch Caret RightMain Menu Loan Loans Personal Loans Student Loans Auto Loans Loan calculators Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Invest Investing Best of Brokerages and robo-advisors Learn the basics Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Home Equity Home equity Get the best rates Lender reviews Use calculators Knowledge base Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Loan Home Improvement Real estate Selling a home Buying a home Finding the right agent Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Insurance Insurance Car insurance Homeowners insurance Other insurance Company reviews Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Retirement Retirement Retirement plans & accounts Learn the basics Retirement calculators Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Advertiser Disclosure
Advertiser Disclosure
We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free - so that you can make financial decisions with confidence.
Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money
The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you. SHARE: Ramon Espelt Photography/Shutterstock November 01, 2019 Amanda Dixon Brian Beers is the managing editor for the Wealth team at Bankrate. He oversees editorial coverage of banking, investing, the economy and all things money. Bankrate logo The Bankrate promise
At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict editorial integrity, this post may contain references to products from our partners. Here's an explanation for how we make money. Bankrate logo The Bankrate promise
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy. Our banking reporters and editors focus on the points consumers care about most — the best banks, latest rates, different types of accounts, money-saving tips and more — so you can feel confident as you’re managing your money. Bankrate logo Editorial integrity
Bankrate follows a strict , so you can trust that we’re putting your interests first. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. Key Principles
We value your trust. Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens. Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate. We maintain a firewall between our advertisers and our editorial team. Our editorial team does not receive direct compensation from our advertisers. Editorial Independence
Bankrate’s editorial team writes on behalf of YOU – the reader. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information. Bankrate logo How we make money
You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. Many Americans are burdened by bad credit and at all. One product seems to help resolve both issues at the same time: a credit-builder loan. Typically offered by credit unions and community banks, credit-builder loans allow consumers to borrow money and pay it back in monthly installments. Borrowed funds are locked up in a secure savings account that becomes accessible once the loan is repaid in full. While there’s an opportunity to build credit and save money, there are some downsides to having a credit-builder loan. The savings account, for example, is an added benefit but won’t completely solve the problem of a lack of savings for a rainy day. “It’s a credit-building product, not a savings-building product,” says Greg McBride, CFA, Bankrate’s chief financial analyst. “If the goal is to build savings, just make regular deposits into a savings account rather than making loan payments.” Building credit as you save
Having good credit is necessary to qualify for the best car loan and mortgage rates. But in the process of building credit, you usually end up spending money. You might use a credit card, for example, to buy groceries and show lenders you can use credit responsibly. But if you’re not careful, you could waste money on interest for overdue payments. You can come across the same issue when taking out other types of loans. Making student loan payments consistently and on time can help you improve your credit score. But interest continues to add up, leaving you spending more money than you borrowed in the first place. Credit-builder loans, on the other hand, require you to not only make payments (and pay interest) but to save money as well. When everything is paid off, you’ll receive a payment equal to the amount you borrowed (plus interest in some cases). [COMPARE: ] Credit-builder loans vs secured credit cards
A credit-builder loan can be a good option for someone who can’t qualify for a traditional credit card. It’s considered an installment loan for credit reporting purposes (under the FICO scoring model). And as you make payments, the credit bureaus are notified, helping you potentially boost your credit score. A is also designed to help consumers build credit. These cards, however, require an upfront deposit. This becomes your credit limit, establishing the maximum amount you can spend with your card. If you fail to make payments, your credit card issuer can keep some of the money from your original deposit. Otherwise, you’ll constantly have access to revolving credit that you can use to spend on different items. With a credit-builder loan, the lender (your credit union or bank) puts money into a savings account on your behalf. The money isn’t yours until you’ve paid off the loan, leaving you with an account full of savings at the end of your term. Someone trying to build credit could use a credit-builder loan in conjunction with a secured credit card, says personal finance and credit card expert Beverly Harzog. Another option, she says, is to have a credit-builder loan and be an on a parent’s credit card account. Potential pitfalls
As with any financial product, its important to know what you’re signing up for. There may be fees involved with applying for a credit-builder loan, reducing the amount of money you end up saving. You can also ruin your chances of using the product to get access to better rates if you struggle to keep up with the monthly payments. “You need to be sure that you have positive cash flow and that you can make these payments on time,” Harzog says. “Because if you don’t, that doesn’t look right. You’re not building credit.” Pay close attention to all the terms and conditions associated with the loan. Note the interest rate and ask plenty of questions. If you have a lot of debt and you’re not sure a credit-builder loan is something you can take on, consider talking to a credit counselor instead, Harzog adds, who can meet with you for free and offer advice. Qualifying for a credit-builder loan could be difficult if you don’t live in a particular area or qualify for membership at a particular credit union. An alternative is the , a standalone, product offered by Austin Capital Bank that’s available in most states. Borrowers who take out an installment loan and pay it off can build savings of as much as $1,000 in 12 months or $2,000 in 24 months. Building an adequate savings cushion
Credit-builder loans help borrowers get into the habit of regularly making payments and in the end leave them with some savings. But they’re not ideal in the long run for consumers hoping to grow their emergency savings fund or set aside money for a major purchase, like a home. Taking on additional debt just to save money is risky. A better approach would be to automate your savings. That way, you’re guaranteed to have savings after every pay period. There are and budgeting tools that can help you make adjustments in order to spend less and put away more money. Even a product like a could be helpful if your biggest issue is the temptation to dip into your savings account or overspend. Learn more
SHARE: Amanda Dixon Brian Beers is the managing editor for the Wealth team at Bankrate. He oversees editorial coverage of banking, investing, the economy and all things money. Related Articles