We want to help you make more informed decisions. Some links on this page — clearly marked — may take you to a partner website and may result in us earning a referral commission. For more information, see How We Make Money.
A share-secured loan can be a good place to start if you’re looking to build your credit.
These loans are part of a category of loans known as credit-builder loans, and despite their names they are less about lending money than they are helping you build credit.
Share-secured loans are credit union products, where accounts are often called share accounts to represent part ownership. Savings-secured loans are a comparable bank product, and both function similarly to CD-secured loans.
How They Work
The money in your share account at a credit union is used as collateral for the loan, and serves as the guarantee to the credit union that you will pay the loan back. If you don’t pay, the credit union can seize the money in your share account, according to Justin Pritchard, a certified financial planner at Approach Financial in Montrose, Colorado. Share-secured loans are only available at credit unions.
Credit unions operate similarly to banks, but have memberships with certain eligibility requirements — often based on employer and geography. There are also online-only credit unions that can be joined for a small fee or donation. The National Credit Union Administration offers a credit union directory so you can find credit unions in your area.
Share accounts are comparable to savings accounts, so you may also be earning interest on the funds in your account — although any money in the account will be frozen if you take out a share-secured loan. Make sure you won’t need that cash for the duration of your loan repayment.
After you take out a share-secured loan, it’s important to make on-time loan payments to help your credit as much as possible, and get that positive payment history reported to the credit bureaus.
Shop around for the best share account rates at local credit unions near you.
While the credit union will often lend up to the full amount of money in your account, “that’s not the purpose of it. It’s probably going to be a smallish loan that’s helping improve your credit so that down the road you can qualify for better loans when you’re trying to buy a car or a house or something,” says Pritchard.
In fact, if your goal is to build credit, keeping it smaller is better.
“There’s no need to burn tons of money and pay interest on a huge loan when you’re not earning much interest,” says Pritchard. “I don’t think it improves your credit any more if you borrow $10,000 versus $200, so keep it as small as possible to get those payments reported to the credit bureaus.”
Keep Your Financial Goals In Mind
Make sure taking out a credit-builder loan aligns with your financial goals before you start. For those in financial trouble, and particularly those already struggling with repaying other loans and debt, taking out this type of loan, “doesn’t make sense,” says William Hatton, a CFP with Billfold Budget Counseling in Los Angeles.
Adding another loan on top of that is not the solution, especially if the interest you’re earning on the share account is significantly less than the loan’s interest rate.
“This isn’t for people in dire circumstances,” says Hatton. “If you’re coming out of debt, though, and have rounded the corner, then this might be something to consider. But make sure you have a good savings base first before you lock your money up.”