How To Get a Credit Builder Loan: What To Know First

A credit builder loan is a small loan designed to help you build credit. Unlike a traditional personal loan, a credit builder loan doesn’t provide immediate funding. Instead, a lender holds a small amount in a secured account while you make fixed monthly payments. Once fully repaid, you receive those funds — and, ideally, establish or improve your credit score in the process.

Read on to learn how to get a credit builder loan and if it's right for you.

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Quick Take

• Credit builder loans are primarily credit-building tools, not borrowing instruments.

• You don’t need good credit or any credit to qualify for one.

• You can get a credit builder loan through a bank, a credit union or an online lender.

• Most credit builder loans range from $300 to $1,000 with repayment periods of 6 to 24 months.

• To find the best one for you, compare costs, look for a savings component and confirm that the lender reports to the major credit agencies.

How To Get a Credit Builder Loan: Step by Step

Here are the steps you'll take to get a credit builder loan.

1. Check Your Credit

Credit builder loans aren’t loans — they’re a credit-building tool. This can double as a forced savings mechanism for people with no, thin or damaged credit.

• It’s important to verify that you meet the loan requirements and to check where your credit is starting from so you can track your progress.

• You can request your weekly credit reports from Equifax, Experian and TransUnion through AnnualCreditReport.com.

• Many banking and financial apps provide free versions of your credit score.

• If you have fair or good credit, you might benefit from a different financial tool, like a rewards credit card, personal loan or certificate of deposit (CD).

2. Compare Credit Builder Loan Providers

Some credit builder loans are more consumer-friendly than others.

• Average annual percentage rates (APRs) can vary from 5% to 29.99%. Higher rates can impact your total borrowing costs and your ability to secure an affordable monthly payment.

• Some lenders may impose administrative or processing fees that can eat into how much you’ll get back at the end of the loan. On the flip side, some providers hold funds in interest- or dividend-bearing accounts, which can preserve or bolster savings.

• You’ll also want to identify which lenders report to credit bureaus to ensure you reap the full rewards of opening and repaying the loan.

3. Choose a Loan Amount You Can Afford

Your monthly payment will also be affected by how much you borrow and how long you’re borrowing for. Most credit-builder loans are small — between $300 and $1,000 — and short-term, lasting from 6 to 24 months.

Here’s a look at how borrowing a large loan, even over a longer term, could impact affordability.

Keep In Mind

Given that missed payments on a credit builder loan can do big damage to your credit, it’s important to choose the loan’s amount and term wisely. An online loan calculator can help you determine which offers fit best within your budget.

4. Apply for the Loan

You can typically apply online, over the phone or in a financial institution branch by providing:

• Government-issued ID, like a driver’s license

• Social Security number or taxpayer identification number

• Proof of income, sometimes in the form of paystubs or tax returns

• Bank account information to set up repayments

Credit builder loans don’t typically require a hard credit check. Instead, a lender might verify your employment.

They also might review your banking history through ChexSystems, a consumer reporting agency that collects and reports checking account data.

5. Make On-Time Payments

Once approved, you’ll be required to make fixed monthly payments across the loan’s term.

• It’s important to make these payments on time and in full or the loan may have the opposite desired effect on your credit score.

• A first late payment of 30 days or more, for instance, can cause a FICO score to drop by close to 100 points.

Many credit-builder loan providers allow or even require you to set up auto-pay via direct deposit from a linked checking account.

6. Receive Your Funds

Once your loan is fully repaid, you’ll receive its full principal amount, minus any fees and plus any interest accrued over the loan’s term.

You can use these funds however you see fit, but it’s worth considering your other financial goals.

For example, they could jumpstart your emergency fund or help you open a secured credit card, which requires an upfront deposit.

Where Can You Get a Credit Builder Loan?

You can get credit builder loans through most financial institutions, including:

• Credit unions: Often offer the most affordable options

• Community banks: May offer affordable options, especially compared to major banks

• Online lenders: Tend to offer fast approval

• Fintechs: Options like CreditStrong and Self offer credit builder loans

You should compare options before deciding on a lender to ensure you get the lowest rate and terms that work best for you.

Who Should Consider a Credit Builder Loan?

Good Fit If

• You have no credit or a thin credit history.

• You’re looking to rebuild your credit after prior missteps.

• You want to prove you can make on-time loan payments.

• You want a structured repayment plan or forced-savings tool.

• You have revolving credit, like a credit card, and want to add a low-risk installment loan to improve your credit mix.

Not a Good Fit If

• You need immediate funding.

• You’re cash-strapped and will struggle to make monthly payments.

• You don’t want to pay fees or interest.

• You already have good credit and an established payment history.

• You have an installment loan and want to improve your credit mix.

How a Credit Builder Loan Helps Your Credit

A credit builder loan can positively impact the following key credit score factors:

• Payment history: This accounts for 35% of most major credit scoring models, so on-time credit builder loan payments alone should improve your credit over time.

• Credit mix: Credit builder loans are installment loans, so opening one could add a new account type to your credit mix, which can further boost your score. Credit mix typically accounts for 10% of your score.

Remember, for the maximum positive impact on your credit, your lender needs to report your credit builder loan to the three major credit reporting agencies: Equifax, Experian and TransUnion.

Credit Builder Loan vs. Secured Credit Card: Key Differences

Credit builder loans are an alternative to secured credit cards, which can also be used to build credit. With a secured credit card, you make a cash deposit when you open the account, and that deposit generally equals your credit limit.

Here are other ways in which credit builder loans and secured credit cards compare.

Can You Get a Credit Builder Loan With No Credit?

You can get a credit builder loan without credit. In fact, these loans are designed for people with no or thin credit histories.

You usually won't need a co-signer or a high income either, as approval requirements for credit builder loans aren't as stringent as those for personal loans or other traditional financing.

Lenders may look at your bank account history in lieu of your credit score when reviewing your credit builder loan application.

Pros and Cons of Credit Builder Loans

Credit builder loans can help you establish or improve your credit, but they come with some trade-offs to consider:

How To Choose the Right Credit Builder Loan

These steps can help you find and choose an affordable, effective credit builder loan:

• Verify that the lender reports to credit bureaus: You’ll want to prioritize applying with those that do, as that level of reporting provides the most robust credit-building benefits.

• Compare costs: Most lenders charge interest on credit-builder loans, though some refund at least some of it once you fully repay. Other fees to look out for include application, processing or origination fees, late payment fees and prepayment penalties.

• Look for a savings component: Some banks or lenders hold credit-builder loans in interest-bearing accounts that can at least offset some of their interest and fees.

• Ask about auto-pay: You don’t want to miss any monthly payments and hurt your credit score once the loan term begins.

Credit Builder Loan FAQs

How much does a credit builder loan cost?

Credit builder loans are generally for small amounts, from $300 to $1,000, and you may need to pay interest as well as fees to take one out.

Can I pay off the loan early?

You may be able to pay off a credit builder loan early. Before doing so consider whether it's worth it. Sticking to the original payoff timeline will mean you have more on-time payments reported to the credit bureaus, which will have the most impact on your credit.

Do all lenders report to credit bureaus?

Not all credit builder loans report to all three credit bureaus, but most do. Before you take out a loan, confirm with the lender that it reports to all three bureaus.

What happens if I miss a payment?

Missing a credit builder loan payment can negatively impact your credit score because the missed payment could be reported to the credit bureaus. Only use a credit builder loan if you can make each payment on time.

Sources

• Federal Reserve. 2024. "An Overview of Credit-Building Products."

• MyFICO. "How Credit Actions Impact FICO® Scores."

Sarah Silbert contributed to the reporting for this article.

Photo credit: Shutterstock.com