Your credit score is determined by the following factors:
- Payment History (35%)
- Credit Utilization (30%)
- Credit History (15%)
- New Credit (10%)
- Credit Mix (10%)
In this article, I will explain how a credit-builder installment loan can improve your credit mix, credit utilization, and your overall credit score.
Installment Loans and Your Credit
There are two main types of credit – revolving lines of credit (credit cards) and installment loans (any loan that requires regular periodic payments). A mixture of installment and revolving credit accounts is preferred in the FICO credit scoring model, which is why credit builder loans are becoming so popular.
Aside from directly improving your credit mix, installment loans also play an important role in your credit utilization. Installment loan utilization is calculated separately from revolving credit utilization, and maintaining a low-balance installment loan will have a positive impact on your credit utilization over time.
Like revolving lines of credit, installment loans will also impact your payment history and length of credit history. However, there are no particular advantages provided by installment loans within these credit scoring factors.
Who Should Obtain a Credit-Builder Loan?
If you have an open installment loan and a record of timely payments, there is little reason to establish another loan. You have already captured the credit benefits described above and the remainder of this article will not apply.
If you have a closed installment loan still showing on your credit report (closed accounts with a positive payment history remain on your credit report for 10 years), you can expect a new credit-builder loan to improve your credit, although the impact will be less than someone with no installment loan history.
If you have an open or closed installment loan with negative remarks (closed accounts with negative payment history remain on your credit report for 7 years), establishing a new credit-builder loan and maintaining a positive payment record can boost your credit score by a large margin.
If your credit report is void of all installment loan information, you can expect a nice credit boost by obtaining a new credit-builder loan.
How to Obtain a Credit-Builder Installment Loan
After substantial research on the subject, I’ve identified three low-cost methods that can be used to establish a new installment loan.
Option #1) Find a loan that you need
If you are thinking about obtaining any type installment loan (mortgage, HELOC, auto loan, business loan, student loan, or personal loan) in the near future, don’t go out of your way to establish a credit-builder loan today. Establishing more than one installment loan will offer very few credit benefits.
If you don’t require an installment loan for an upcoming life event, consider another option listed below.
Option #2) Self Lender credit-builder loan
Self Lender is the easiest way to establish a credit-builder loan without an upfront deposit. Their $545 credit-builder installment loan is the best option for most people because larger loans won’t improve your credit score any quicker.
Here is how it works:
- You pay $15 upfront to establish the Self Lender account
- One of the Self Lender banking partners (several FDIC-insured banks are available) lends you $545 that is held in an FDIC-insured, certificate of deposit bank account (“CD account”) for 12 months. You cannot access the money during this 12-month window.
- You make one $48 payment per month to pay down the loan.
- After 12 months, you’ve paid off the loan and the $545 CD is yours to withdraw.
Self Lender handles all of the details for you, which is one of the main selling points, and the entire process will cost you about $46 out of pocket.
You pay the $15 origination fee + $31 of interest (calculated as $576 in total payments ($48*12) – $545 received after 12 months)
The loan period is 12 months, but keep in mind, closed accounts with a positive payment history are reported for 10 years, so the length of loan might not matter if you anticipate needing a future installment loan before the 10-year window expires.
Self Lender also offers a 24-month $525 loan option. Here you pay $25/month for 24 months ($600), which means you are paying more interest than the $545 loan option. The only reason to choose the 24-month loan is a lower monthly payment ($25 vs $48).
Option #3) Local Bank or Credit Union
There are a variety of smaller financial institutions that offer their own version of a credit-builder installment loan. To find these options, you usually need to call around and ask.
Some of the financial institutions that offer credit-builder installment loans will require a hard credit inquiry before establishing the account. That is something to avoid if possible.
The other problem with choosing a local option is that the terms and conditions vary widely. You have to be diligent about reading each individual loan offering and understanding the fine print. The last thing you want is to sign up for an installment loan to build credit, only to pay a slew of fees over the life of the loan. That would negate any credit benefits received, which is why I believe SelfLender is probably a better option for most.
My Installment Loan Plan
I have closed student loan information that is still included in my credit report, but I established a new credit-builder loan before publishing this article.
Even though I already had installment loan information showing on my credit report, the credit-builder loan boosted my score by approximately 30 points. That’s a meaningful increase that required very little work, and individuals without any installment loan history can expect even larger gains.
If you have experience obtaining a secured installment loan from other financial institutions, please share with a comment below.