Borrowing money is easiest if you already have credit. Credit-builder loans are designed to help people establish credit so that they are more likely to qualify for a credit card or loan later.
Credit-builder loans differ from other loans because you can get one without a credit history — but you don’t receive the money upfront. Instead, the money is kept in a savings account and you get access when you finish paying off or end the loan. These loans can be especially useful for credit newbies.
Other options for getting on the credit radar include:
Having someone with good credit add you to their card as an authorized user.
If you have money in a bank or credit union account, using that money on deposit as security for a loan. Having both a loan and a credit card in good standing can help build credit more quickly.
How SeedFi Credit Builder Plan works
SeedFi’s Credit Builder Plan (formerly called Credit Saver Loan), is timed to your paycheck. You can get a loan of $500 only and can choose a payment of $10 to $40 per pay period. The length of the loan is dictated by the size and frequency of your payments. Repayment periods are from seven months to 27 months, and the annual percentage rate ranges from 4.03% to 5.26%.
There are no origination fees. SeedFi collects $1 per month as a plan fee, and the rest goes into a savings account. If you choose a $20 payment every two weeks, you would pay the loan off in about a year, spend $11.96 in fees and receive $500 at the end.
Choose a payment you can comfortably afford; lower payments are sufficient to build credit. Keep in mind you can close the account when you have reached the score benefit you need and can qualify for credit on your own. Whether you pay the loan off entirely or choose to end it early, the savings account — at Cross River Bank — is yours. You are also free to transfer your account to a different bank or credit union.
As of mid-April, SeedFi was available in 32 states, plus Washington, D.C., covering about 82% of the U.S. population, according to co-founder and CEO Jim McGinley. The company website has a list of where the loans are currently offered.
4.03% to 5.26% (in the form of a monthly $1 plan fee)
7 to 27 months
$10 to $40 per pay period, chosen by customer
How SeedFi Credit Builder Plan can help your credit score
Loan payments are reported to credit bureaus Equifax, Experian and TransUnion each month. On-time payments help build credit directly, by beefing up your credit history. Once you’ve ended the loan, keeping the money in savings can help your score indirectly by providing a cushion so an unexpected expense doesn’t lead to paying bills late.
If you’re building credit from scratch, it’s worth noting that just a couple of months of reported payments will get you a VantageScore, and in six months you should have a FICO score. You can check to see when the account appears on your credit reports by using AnnualCreditReport.com, which currently offers weekly access to credit reports from all three credit bureaus.
Once you have a FICO score, it’s smart to apply for a traditional unsecured credit card and pay it off in full every month. That will also help build your credit.
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How SeedFi is different
Most other credit-builder loans report both positive and negative credit information to credit bureaus. That means if you make a payment at least 30 days late, it will be reported to credit bureaus. That type of negative payment information can devastate your score.
SeedFi’s website indicates that if you are having financial difficulties, they may be able to offer some flexibility. Even if a customer with a credit-builder loan doesn’t reach out, SeedFi presumes financial distress and proactively closes the account at 29 days late, McGinley says. The proactive closure avoids a negative account status being reported to the credit bureaus and hurting your score.
In general, credit-builder loans can be closed early, and borrowers receive access to the part of the loan they have repaid. Closing the loan early is far better than missing a payment, possibly facing late fees and taking a hit on your credit when you were hoping the new account would help.
How to apply for a SeedFi Credit Builder Plan
When you apply, choose Credit Builder Plan as the product. To be approved, you must:
Be at least 18 years old (19 in Alabama and Nebraska).
Provide an email address and verifiable phone number.
Provide your Social Security number and birthdate (for identification purposes).
Be a resident of a state where SeedFi is licensed.
Have a way to pay electronically.
SeedFi offers a related Borrow & Grow Plan
In addition to its credit-builder loan, SeedFi offers a Borrow & Grow Plan that includes a savings component but also provides access to money immediately. In this plan, when the loan is fully repaid, it unlocks an additional savings account amount.
The amount borrowed immediately can range from $300 to $4,000, and the additional savings amount available at the end of the loan can be from $250 to $4,000. The APR is from 6.95% to 29.99%, and loans run from 5 months to 44 months.
SeedFi gives an example of $4,500 borrowed, with $3,000 of it available upfront. The APR is 19.99%, with payments of $80 every two weeks for about three years. At the end of the loan, you get the remaining $1,500 and will have paid $1,417 in finance charges.
McGinley says the amounts of money borrowed and saved can be adjusted according to customers’ risk profiles and preferences. APRs are adjusted downward if the savings amount is increased.
However, NerdWallet recommends saving separately from repaying a loan. Even if you are paying exactly the same amount per paycheck, dividing savings and debt repayment gives you more flexibility. You can skip a savings deposit in lean months, or in an emergency can dip into savings to pay the loan on time.