We all know you need to establish a credit history to move through life – unless you’re Dave Ramsey. He argues you don’t need credit and should pay cash for everything.

But the reality is few people have the cash to buy a car or a house outright. You need a credit history to lease a car or to get a loan to buy a car. It’s difficult to rent an apartment or get a mortgage on a house without a credit history.

For many others, rebuilding credit after going through difficult financial times – a bankruptcy, for example – is the goal. So how do you defy Dave Ramsey and build credit, or rebuild credit? One way is by getting a credit builder loan.

How does a credit builder loan work?

Credit builder loans, also known as “fresh-start loans” or “starting over loans”, generally help people with poor credit history improve their credit or rebuild credit after a bankruptcy. But they also can help people establish a credit history who don’t have one.

With the most common credit builder loan, you apply for the loan and once approved, the lender puts the funds into a savings account that you can’t touch until you’ve paid off the loan. Another version of the credit builder loan is secured by your savings or a certificate of deposit. But once you get the loan, the savings amount securing the loan is locked until the loan is paid.

A key to obtaining any credit builder loan is having the income to make the payments. If you don’t make the payments, you put yourself in the negative credit territory rather than positive credit territory. The loan amounts typically range from $100 to $1,000. You might be able to find one for $1,500. Payoff terms usually run six months to a year.

How to get a credit builder loan

You may be asking, “How do I get a credit builder loan?” There are a variety of options out there for credit builder loans – credit unions, small community banks and non-profit organizations. Depending on the non-profit, you may be able to get credit builder loan interest free.

They use “lending circles” in which a people seeking to build their credit help each other. Each person in the group pays a set amount into a fund and they take turns getting the credit builder loan. The monthly payments into the fund are reporting to the credit bureaus.

The non-profit groups focus on consumers they believe are underserved. Those types of programs come with personal finance coaching with the goal of not only ensuring the consumer builds credit but does so responsibly and with

According to the Asset Funders Network, a group that works with low to moderate income people, a credit builder loan helps boost a borrower’s FICO score substantially. In one example, a network client got a $500 credit builder loan and went from basically no FICO score to a FICO score of 713 a year later.

How to build credit

The network has a variety of programs that help people build or rebuild credit. A credit builder loan is one piece of it. In some situations, the network pairs the credit builder loan with a secured credit card.

With a secured credit card, you put money on the card after you’ve been approved. That secures the card. Whatever you put on the card is your credit limit. This way, if you don’t pay, the card issuer has recourse.

The goal is to build up the credit score over time. Once you pay off the credit builder loan, you take the funds and put them toward a secured credit card. Asset Funders Network’s client with the 713 FICO score did just that and obtained a car loan a year later.

While it would be wonderful to pay cash for everything, there are just too many places where you need to have good credit. If you don’t have the credit history, going with a credit builder loan may be your best bet.

As long as you make the payments on time with a credit builder loan, you build credit. Miss a payment and that puts you a step backward. You have to ensure you have the income to make the payments and budget for the payments.

A LendingPoint loan can be part of your credit story

LendingPoint does not offer credit builder loans, but we do have loans for borrowers with a wide range of FICO credit scores, from 580 to 850. As you build your credit history and find yourself looking for an unsecured personal loan, please keep us in mind. And good luck on the journey. It’s worth the effort!