Credit Builder Loan: How It Works and Where To Get One

A credit builder loan is an account offered by some banks, credit unions and other financial institutions that helps 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 a credit builder loan is — 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. 

Key Takeaways

• A credit builder loan helps you build credit even if you have little or none. You don't need a good credit score to qualify, just proof of steady income and an active bank account.

• Your payments are reported to the credit bureaus, which is how your score grows. Steady, on-time payments can raise your score by 35 to 60 points over the life of the loan.

• Make sure your lender reports to all three credit bureaus. If they only report to one, some lenders may never see your progress.

• When the loan is done, you get the money back. It works like a savings account and a credit-building tool at the same time.

Summary generated by AI, verified by MoneyLion editors

How Does a Credit Builder Loan Work?

Instead of getting all of your funds at once, as you would with a personal loan, your credit builder loan is kept in a special savings account.

This is how it works, step-by-step:

1. Submit your application: Lenders will review your income and banking history. No credit score is usually required.

2. Loan funds are deposited: If approved, your loan funds are deposited into a savings account.

3. Make monthly payments: Don’t miss a payment on your loan. Continue to make consistent payments if you want to improve your credit score.

4. Lender reports payments to bureaus: Ideally, you’ve chosen a lender that reports to all three credit bureaus.

5. Complete your repayment term: Once all payments are made, the loan term is up.

6. Collect your funds: You can now get the money that has accumulated in your savings account.

Best Credit Builder Loans Compared

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.

Who Should Consider a Credit Builder Loan?

If you’re having trouble getting approval for a loan or credit card, you should consider a credit builder loan. These loans are ideal for:

• Those who have a limited credit history.

• Those with low credit scores due to credit mistakes.

• Those who need to start over financially and build a clean financial credit record.

Pros and Cons of Credit Builder Loans

Credit builder loans come with some advantages and disadvantages you should consider:

Do Credit Builder Loans Really Work?

Yes, credit builder loans do work if you do the following:

• Make fixed, consistent payments monthly.

• Have a lender that reports to all three credit bureaus.

• You don’t have any revolving debt risk.

Over the length of the loan, you can bump your credit score by 35 to 60 points. However, if you miss payments or your lender reports to only one credit bureau, your credit score could be harmed.

What Credit Score Do You Need to Qualify?

The good news is that most lenders don’t require a minimum credit score to qualify. Instead, most lenders look at the following:

• Proof of steady income

• No recent bankruptcies on account

• Active checking or savings account in good standing

• No existing unpaid loans

Alternative Ways To Build Credit

There are other ways to build credit. Here’s how:

• Get a secured credit card: You'll submit a refundable security deposit, which often dictates your credit limit. Secured cards 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 and they add you as an authorized user, many banks will report their good credit habits to your credit score.

• Use 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.

• Use credit builder apps and tools: There are credit-builder apps and 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. Before you commit to a specific credit builder loan, take a look at this checklist:

• Look for low fees and affordable payments: 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.

• Aim for low 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.

• Confirm reporting to all three credit 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.

Final Thoughts: What You Need To Know About Credit Builder Loans

• A credit builder loan is helpful for those who have little credit history or need a financial reboot for past credit mistakes.

• If you make consistent payments every month, you should be able to raise your score by 35 to 60 points, provided the lender reports to all three credit bureaus.

• For a credit builder loan, look for low fees, short repayment terms and affordable payments.

• There are alternative ways to build your credit through a secured credit card, becoming an authorized user or using rent-reporting services.

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

How much can a credit builder loan raise your score?

The results vary depending on your starting point. However, for those who have little credit history, expect a 35 to 60 point bump during the life of the loan.

How long does it take to build credit?

You can have some credit history within three to six months of credit activity.

Do credit builder loans require a credit check?

Most traditional credit builder loans will not require a hard credit check.

What happens if you miss a payment?

Missing a payment can hurt your credit score, which defeats the purpose of the loan. Also, missing a payment can be reported to the respective credit bureaus.

Key Terms

• Credit builder loan: A small loan where funds are held in a savings account while the borrower makes monthly payments. Once the loan is repaid, the funds are released, and the payment history is reported to credit bureaus.

• Credit bureau: One of three agencies — Experian, Equifax and TransUnion — that collect and maintain consumer credit information. Lenders use reports from these bureaus to evaluate borrowers.

• Secured credit card: A credit card that requires a refundable security deposit, which typically serves as the card's credit limit. It is a common alternative to a credit builder loan for establishing credit.

• Authorized user: A person added to someone else's credit card account. The primary cardholder's payment history may be reported to the authorized user's credit file, which can help build credit.

• Credit utilization ratio: The percentage of available revolving credit currently in use. Keeping this ratio low is one of the most effective ways to maintain or improve a credit score over time.

Summary generated by AI, verified by MoneyLion editors

Sarah Hostetler contributed to the reporting for this article.