[PDF] Credit Building or Credit Crumbling? A Credit Builder Loan's Effects on Consumer Behavior, Credit Scores and Their Predictive Power | Semantic Scholar (2024)

FAQs

Does credit builder affect credit score? ›

If you make regular on-time monthly payments, credit-builder loans are a good opportunity to improve your credit scores.

Too many hard inquiries over a short period of time can be a red flag to lenders and lower your credit scores. Why? Because applying for multiple credit cards may suggest that you're spreading yourself too thin and taking on more credit than you can reasonably repay.

A FICO Score is a three-digit number based on the information in your credit reports. It helps lenders determine how likely you are to repay a loan. This, in turn, affects how much you can borrow, how many months you have to repay, and how much it will cost (the interest rate).

Credit-builder loans can be a strategy for boosting credit and saving, especially for people who are credit invisible or those who need to beef up their credit file. They may be a good idea if you have the income to make regular, on-time payments.

How Much Will A Credit Builder Loan Raise My Credit Score? According to a Consumer Financial Protection Bureau (CFPB) study on credit builder loans, study participants without existing debt saw their credit scores increase by 60 points more than participants with existing debt.

When you open a new credit account, it lowers the overall age of your credit. In addition to the age of credit, opening up any new credit account generally requires a hard inquiry, which could ding your credit score a few points temporarily. After about two years, the inquiry should drop off.

Since hard inquiries affect your credit score and what is found may even affect approval, you might be wondering: How many inquiries is too many? The answer differs from lender to lender, but most consider six total inquiries on a report at one time to be too many to gain approval for an additional credit card or loan.

Making late payments, even a single day late, can significantly affect your credit. This becomes especially true if you make a habit of paying late. Some lenders or credit card companies will charge you a fee for being a single day late and could cut you off from making further purchases on the account.

Excellent (800 to 850): Lenders generally view these borrowers as less risky. As a result, individuals in this range may have an easier time being approved for new credit. Very good (740 to 799): Very good credit scores reflect frequent positive credit behaviors. Lenders are likely to approve borrowers in this range.

What is a very good FICO score? ›

Highlights: While older models of credit scores used to go as high as 900, you can no longer achieve a 900 credit score. The highest score you can receive today is 850. Anything above 800 is considered an excellent credit score.

In a nutshell, a beacon score tells the story of an individual's past and current credit history. Lenders use this as a predictor of future behavior; if someone has a history of missed or late loan payments, the beacon score will be low.

The highest score you can have on the most widely used scales is 850. According to data from FICO, about 1.7% of all FICO scores were at the coveted 850 as of April 2023. And even if you do get there, the fluctuating nature of credit scores means you're unlikely to keep it month after month.

Most notably, credit-builder loans can improve your credit score. As you pay each month those on-time payments are reported to credit bureaus. Payment history accounts for 35 percent of your score, and as that improves your credit score will follow.

A credit-builder loan allows you to make fixed payments into a savings account over several months. At the end of the term, the lender will return to you the balance of the account―possibly including some of the interest you paid―and you'll strengthen your credit with positive payment history.

Lenders will also report negative information to credit bureaus if you miss a credit-builder loan payment or make a late payment. However, if you make your monthly payments on time, the lender will report positive information to the credit bureaus, which improves your score.