Credit Builder Loan: What Is It, How It Works, How to Get One

A credit builder loan is an account offered by some banks, credit unions and other financial institutions that help you repair or build credit history. Those who have a hard time being approved for things like credit cards may find credit builder loans extremely helpful.

Here's more about what is a credit builder loan — and how it can improve your credit score.

MoneyLion offers a seamless way to explore personal loan offers. Learn what you could qualify for and compare rates, repayment terms, fees, and more. 

How Does a Credit Builder Loan Work?

Instead of getting all of your funds at once, like you would with a personal loan, your credit builder loan is kept in a special savings account. You'll be charged monthly for it. When you make a payment, the lender reports those good habits to the credit bureau, which builds your credit. Credit builder loans often have repayment terms that last between six months and two years.

Once the repayment time is up, you can withdraw the money you've paid over the duration of the loan, minus any interest.

Who Should Consider a Credit Builder Loan?

If you can't seem to lock down an approval for a credit card, loan or other tool that allows you to bolster your credit profile, a credit builder loan may be your best shot. This may include those with limited credit history, young adults, for example, or those who have made mistakes with credit in the past and find themselves with a low credit score.

Some benefits of credit builder loans include:

• Easier approvals thanks to relaxed qualification requirements

• Building credit with healthy activity

• Forming responsible financial habits through

• Automating your savings

Downsides To Be Aware Of

When you choose a credit builder loan, there can be some cons to consider. Take a look at these:

You'll Pay Interest

Most credit builder loans charge interest — meaning you'll have to pay for the

Building Good Credit History Isn't Guaranteed

A credit builder loan account doesn't guarantee you'll build a good credit history. If you're late on payments or default, your credit history will still show you've had some missteps with your credit in the past. That can actually be worse than having no credit history. As long as you treat it responsibly, you'll improve your credit score, though it can take time — possibly six months or more.

Funds Aren't Given Upfront

Again, you don't receive any funds upfront in the same way you'd expect for a traditional loan. This account has nothing to do with spending money before you have it.

Where Can You Get a Credit Builder Loan?

You typically can't get a credit builder loan from major banks like Chase and American Express®.

Instead, you'll often find them from select community banks, credit unions and online lenders like Self.

Alternative Ways To Build Credit

There are other ways you can build your credit, including:

• Secured credit cards: You'll submit a refundable security deposit, which often dictates your card's credit limit. These are easier to be approved for, as the bank can simply use your money to pay off your debt if you default.

• Become an authorized user: If you've got a family member or friend with good credit, you can ride their coattails to solid credit. When they add you as an authorized user, many

  banks will report their good credit habits to your credit score.

• Rent reporting services: Some companies, such as Self and Boom, will report your on-time rent payments to credit bureaus to show that you can pay recurring bills on-time. This is great if you don't have another type of revolving line, like a credit card, that you pay off each month.

• Credit-builder apps or tools: Not unlike some rent reporting services, there are credit-builder apps/fintech platforms that report activity, such as your utility payments, streaming or subscription payments, phone payments, etc. — for example, Experian Boost.

How To Choose the Right Credit Builder Loan

The best credit builder loan helps diversify your credit profile and is easy to manage.

Look for Low Fees

Find a lender that offers a payment plan you can afford. Yes, you're getting your money back as soon as the loan is paid off, but you still shouldn't make large payments that you can't swing.

Steer Clear of Long Repayment Terms

It's also typically wise to avoid loans with lengthy terms, as you may qualify for other loans and lines of credit in six months or so. Remember, a credit builder loan is just training wheels until you achieve fair credit.

Ensure Your Lender Reports to the Major Bureaus

Finally, it's best if your lender reports your positive activity to all three major credit bureaus: Experian, TransUnion and Equifax. This guarantees your future lenders will see your good habits, no matter which credit bureau they use to pull your credit report.

MoneyLion’s Credit Builder Plus membership offers a credit builder loan that’s been able to help people grow their credit score 27+ points in 60 days. It’s reported to all 3 credit bureaus and you may be able to open a $100 trade line with no hard credit check!

FAQs

What is a credit builder loan?

A credit builder loan generally takes the form of an installment loan. A financial institution "lends" you money kept in a savings account. You must pay the loan monthly, which the lender reports to credit bureaus. Once the loan is paid off, you'll get the money — and you'll have credit history.

Do credit builder loans really work?

Credit builder loans absolutely work. You should see an improvement to your limited or bad credit as soon as six months.

What happens if I miss a payment?

If you miss a payment on a credit builder loan, your credit will suffer — big time. Payment history accounts for 35% of your credit score. That said, you'll generally have about 30 days to bring your account current before the credit bureaus will ding you.

Are there other ways to build credit?

There are plenty of other ways to build credit outside of a credit builder loan, from secured credit cards to becoming an authorized user on your family member's credit card.