How Long Should I Use a Credit Builder Program? 

How Long Should I Use a Credit Builder Program? 

November 9, 2020         Written By Bill Hardekopf

Credit builder loans help people with no credit to establish a history. They also help people with bad credit improve their scores. If you’re planning to use a credit builder program to improve your credit history or boost your score, how long should you use one?

It’s not as clear cut as you might think. It comes down to what your credit report shows. Someone with no credit history, such as a high school graduate, will need less time than someone who has filed bankruptcy in the past few years.

A credit builder program helps improve your credit score by improving the payment history ratio. The more on-time payments you have, the better it is. Ideally, you want a credit report that’s filled with nothing but on-time payments. Here are the factors that go into determining how long you should use a credit builder loan to improve your credit score.

The Keys to a Credit Score

There are two main types of credit scores. This is important to know as most banks and credit unions rely on FICO scores, but some lenders use VantageScore.

While FICO and VantageScore use similar criteria in establishing a credit score, how much impact these factors have on your credit score varies. Take a closer look at FICO’s factors.

  1. Payment History – 35%
  2. Credit Utilization/Amount Owed – 30%
  3. Length of Credit History – 15%
  4. New Credit – 10%
  5. Credit Mix – 10%

FICO scores range from 300 to 850. A score of 800 to 850 is “exceptional.” A score of 740 to 799 is “very good.” A score of 670 to 739 is “good.” With a score of 669 or lower, it’s going to be harder to get loans and credit cards with favorable terms.

With a FICO score, bankruptcy has the most damaging impact with recovery to your score starting after six years. A foreclosure on your home takes about three years before recovery is seen. Missed payments take up to 18 months before improvement is seen.

If a mortgage payment is 30 to 90 days late, it can take nine months before you see your score recover. Finally, closing a card account, maxing out a credit card, or applying for a new card all take three months before your score starts to recover.

Compare that to a VantageScore. These are the factors that are used in the popular 3.0 version.

  1. Payment History – 40%
  2. Length of Credit History – 21%
  3. Credit Utilization – 20%
  4. Balances Owed – 11%
  5. New Credit – 5%
  6. Available Credit – 3%

Version 4.0 is similar with most percentages only being a percent different in two categories.

  1. Payment History – 41%
  2. Length of Credit History – 20%
  3. Credit Utilization – 20%
  4. Balances Owed – 11%
  5. New Credit – 6%
  6. Available Credit – 2%

The VantageScore system has three versions. The older 2.0 ranged from 501 to 990. Vantage 3.0 and 4.0 a range of 300 to 850. VantageScore 3.0 and 4.0 score ranges are designed to be competitive to FICO scores. For the best loan and credit card APRs, aim for the “Superprime” range of 781 to 850 or “Prime” of 661 to 780. A credit score of 660 or lower isn’t ideal.

With a VantageScore, certain actions will drop your credit score for as long as 10 years. If you file a bankruptcy, it can reduce your score by up to 90% and impacts your score for up as much as 10 years. A missed payment or default reduces your score by up to 50% and may take a year and a half to recover from.

Maxing out a credit card reduces your score by as much as 30%. If you close an account, it drops your score by as much as 20%. Opening a new credit card account impacts your score by 10%. All three of those take about three months to recover from.

How Does a Credit Builder Loan Help Boost Your Score?

A credit builder loan is a risk-free loan that doesn’t require a credit check. You “borrow” funds from the bank. The difference is that the funds are not given to you when you apply. Instead, you make monthly payments that go into a locked bank account.

Each monthly payment goes into that locked account once the bank’s loan fee is removed. Over time, the balance builds up. After the final loan payment is made, the money matches the loan amount and is unlocked. You can spend it, keep it in the savings account, or transfer it to your bank.

Those monthly payments are reported to the three credit bureaus. As long as you make the payments on time, you get a positive payment report submitted. Over time, that boosts your score. Don’t miss a payment as it will be reported as a missing or late payment, which can damage your score.

If you have to cancel the credit builder loan, you don’t go into default. Let the bank know before your loan payment is due. Any money built up at this stage becomes yours. You won’t pay cancellation fees for quitting the credit builder program early. You will damage your score if you simply stop paying without alerting the bank.

How Long Should You Use a Credit Builder Loan?

Credit Builder products usually start with 12-month terms and increase from there. Some loans offer terms of up to 10 years. By investing more time, you have more money and more on-time payments which will help increase your credit score.

If you don’t have a credit score because you don’t have any credit cards or loans, you’ll see improvement after six months. A 12-month credit builder loan is good. At that point, check your score. You can decide to take out another credit builder loan if you want to keep improving your score.

Using that information, how long do you need a credit builder loan? You need to look at the factors that cause your score to drop. If your score is low because of late or missing payments, it can take three to six months to start seeing improvements. The improvements will be gradual, however. Aim for a year or two to see a substantial increase in your score.

If you’re recovering from a bankruptcy or foreclosure, you may want to consider a 10-year credit builder loan. If you have to cancel the loan early, don’t worry. Credit builder loans can be canceled without penalties. Let the bank know that you need to cancel it. The money you’ve built up in the credit builder account is given to you.

Tips for Applying

Applying for a credit builder program is easy. You do need a checking account or acceptable debit card that can be used to make your monthly payments. You need a verifiable address. You have to have a valid mobile phone number that can be verified. If you don’t have a mobile phone, get a Google Voice number. Many programs allow you to use a free Google phone number. Finally, you need an SSN or ITIN.

Make sure you fill out the online credit builder application correctly and completely. If you put in the incorrect information or forget something, your application may be denied. Prevent disappointment by filling out everything and checking it over before you submit it.

The information contained within this article was accurate as of November 9, 2020. For up-to-date information on any of the terms, cards or offers mentioned above, visit the issuer's website. Many of the offers on this article are from our affiliate partners, and LowCards.com may be compensated if you take action with any of our affiliate partners.

Review LowCards.com Editor’s Top Cards!

2020 Top Credit Cards by Category
Featured Prepaid Card
NetSpend® Visa® Prepaid Card
EDITOR RATING
Featured Prepaid Card
NetSpend® Visa® Prepaid Card

Applying for this card will securely direct you to the issuer's website.

Top Features: No late fees or interest charges because this is not a credit card it is a prepaid card. 

Featured Secured Card
Assent Platinum 0% Intro Rate Mastercard Secured Credit Card
EDITOR RATING
Featured Secured Card
Assent Platinum 0% Intro Rate Mastercard Secured Credit Card

Applying for this card will securely direct you to the issuer's website.

Top Features: Intro APR Offer on Purchases

Featured Fair Credit Card
Reflex Mastercard® Credit Card
EDITOR RATING
Featured Fair Credit Card
Reflex Mastercard® Credit Card

Applying for this card will securely direct you to the issuer's website.

Top Features: All credit types welcome to apply!

Featured Bad Credit Card
First Digital NextGen Mastercard® Credit Card
EDITOR RATING
Featured Bad Credit Card
First Digital NextGen Mastercard® Credit Card

Applying for this card will securely direct you to the issuer's website.

Top Features: Reports to all three credit bureaus, perfect credit not required for approval


bill-hardekopf

About Bill Hardekopf

Bill Hardekopf is the CEO of LowCards.com and covers the credit card industry from all perspectives. Bill has been involved with personal finance for over 15 years. He is a frequent contributor to Forbes, The Street and The Christian Science Monitor.