In a Nutshell
Credit-builder loans may help if you have no credit or limited credit or if you are trying to improve your credit scores. A lender agrees to lend you a certain amount of money, which it deposits into an account it controls. You’ll make payments on the loan, and the lender reports those payments to the credit bureaus, which may help boost your credit. When the loan is paid off, the lender gives you the funds.Credit-builder loans can help solve one of the most frustrating problems you face when trying to improve your credit.
Because lending involves risk, lenders are more inclined to lend money — and to offer better terms — to people who have good credit. That’s because good credit signals that someone is more likely to pay back a loan. But you can’t build good credit unless a lender gives you a chance.
Credit-builder loans are designed to solve this problem by being structured a bit differently than traditional loans. A lender doesn’t actually give you access to money you’ve agreed to borrow until you’ve paid a certain amount into the loan (or paid it in full).
These loans give you an opportunity to improve the health of your credit even if you have a limited credit history or poor credit.
We’ll review in more detail what a credit-builder loan is, how it works and our take on the best credit-builder loans and their features.
- What is a credit-builder loan?
- Will a credit-builder loan raise my credit scores?
- Is a credit-builder loan worth it?
- Best credit-builder loans
- 4 factors to consider when choosing a credit-builder loan
What is a credit-builder loan?
A credit-builder loan is a small loan deposited into a locked savings account for a specified period of time.
Credit-builder loans are designed to help if you have no credit, poor credit or if you are trying to build or improve your credit history. These loans are less risky for the lender since the funds aren’t distributed until the loan is paid — either partially or in full.
But the monthly payments are treated like any other installment loan, so timely payments are needed to help you build that positive credit history.
Credit-builder loans typically range from $300 to $1,000 with repayment terms ranging from six to 24 months.
How does a credit-builder loan work?
With a credit-builder loan, you’ll make monthly payments on the loan, and the lender will report your payments to the major credit bureaus. Once your repayment term is up or you complete the minimum number of payments required to “unlock” some or all of the loan, you’ll receive access to the funds.
Where can you find credit-builder loans?
Credit-builder loans can be found at banks, credit unions and online lenders, but not every lender will offer a credit-builder loan. It’s always a good idea to shop around to find the best terms before signing up for a credit-builder loan.
Will a credit-builder loan raise my credit scores?
How much — or if — your credit scores improve after you take out a credit-builder loan will depend on a variety of factors, including whether you had debt beforehand. A 2020 Consumer Financial Protection Bureau study found that borrowers without debt saw the biggest benefits from taking out a credit-builder loan.
People without an existing loan increased the likelihood of having a credit score by as much as 24%, according to the CFPB report. And participants without existing debt saw their credit scores improve by as much as 60 points more than those with existing debt, the report said.
Keep in mind that you’ll also need to make payments on time since that’s an important factor in your credit scores — up to 40% of your credit score is calculated based on your payment history.
Is a credit-builder loan worth it?
Whether a credit-builder loan is worth it will depend on your individual situation. But a credit-builder loan might be worthwhile if you want to build your credit and have the ability to repay the loan.
Credit-builder loans can help you build up your credit score and payment history — one of the biggest factors that go into calculating your credit score. Another great aspect of a credit-builder loan is that you’ll receive the funds back at the end of the repayment period, which can help you jump start your savings.
Best credit-builder loans
If you’re interested in applying for a credit-builder loan, here are five to consider.
Best for low credit scores: Self
Why Self stands out: Self credit-builder loans may be a good option for people with lower credit scores. Credit-builder repayment plans start at $25 per month. And you can apply for a Self credit-builder loan without a hard inquiry on your credit.
Self also gives you the option to cancel the loan at any time and get the money you paid into savings back — minus interest and fees. (You’ll pay a nonrefundable administration fee to take out the loan.)
Read our full review of Self credit-builder loans.
Best for immediate access to money: MoneyLion
Why MoneyLion stands out: MoneyLion gives you access to a portion of your loan funds right away. However, you’ll have to pay a $19.99 monthly membership fee on top of your monthly loan payments. MoneyLion offers credit-builder loans up to $1,000.
If you need a way to build your credit but also need to access to some of the cash quickly, MoneyLion could be a good option for you. And if you apply for a loan, MoneyLion won’t perform a hard check on your credit.
MoneyLion also offers credit monitoring to help you track your credit scores along the way.
Read our full review of MoneyLion to learn more.
Best for full-service banking: Digital Federal Credit Union
Why Digital Federal Credit Union stands out: You can access a range of banking services through Digital Federal Credit Union, also known as DCU. The lender offers a variety of banking services, including checking accounts, auto loans, savings accounts and retirement accounts.
The money you pay into your DCU account for a credit-builder loan earns dividends. Plus, if approved, you won’t have to make any payments for the first 60 days.
Keep in mind that since DCU is a credit union, you’ll be required to qualify for membership by working for a participating employer (DCU has a very long list), having a family member who belongs to DCU or by being a member of a participating organization.
Read our review of Digital Federal Credit Union loans to learn more.
Best for larger loan amounts: Credit Strong
Why Credit Strong stands out: Credit Strong offers several credit-builder loan options, but its CS Magnum accounts offer amounts of $2,000 to $30.000. And there’s no credit check or upfront deposit required to apply.
Credit Strong recommends CS Magnum accounts for people who are looking to “show that you can handle large amounts of credit.”
Best for paying at your own pace: Credit Karma Credit Builder
Why Credit Karma stands out: This credit-builder account allows you to choose how much of your paycheck goes toward a locked savings account (with a minimum of $10 for each deposit) — until you’ve paid a total of $500. And if you a little bit short on extra cash for a month or two, it’s even possible to skip making a payment toward your Credit Builder account. So if you’re not ready to commit to putting aside a large amount of money every couple of weeks, Credit Karma Credit Builder could be a good option for you.
To qualify for this account, you’ll need to open a Credit Karma Money™ Spend account and set up a direct deposit of $750 or more, or connect an external account.
Credit-builder loans typically don’t allow you to access the money you’re paying until you’ve completed all of your payments. Once you’ve paid $500 toward the locked savings account, Credit Karma transfers the money back to you — so you’ve effectively built up your savings as well as your credit.
4 factors to consider when choosing a credit-builder loan
Taking out a credit-builder loan and making timely payments can be a good way to build a positive credit history, especially if you don’t have any existing credit. But you’ll want to compare your options before applying. Here are four factors to consider.
Loan APRs
When you’re applying for a credit-builder loan, some of the most important details to pay attention to are the APRs and the total interest you’ll be paying. Make sure you understand the full cost of the loan, and if the information on the lender’s website is unclear you may want to contact it directly for more information.
Loan repayment terms
You also want to make sure you can afford the monthly repayments. Longer loan terms may be more affordable, but you’ll end up paying more money in interest. On the other hand, shorter loan terms may have lower interest rates but higher monthly payments. Think about what’s most important to you.
Loan fees
With any loan, there may be some fees involved — and it’s a good idea to know what these are before signing up for your loan. Some common fees are application fees or late fees if you don’t make your payments on time.
Credit reporting
With a credit-builder loan, it’s essential to know whether the lender reports to any credit bureaus. Before applying for a credit-builder loan, check if the lender reports to credit bureaus, so you can make sure that your hard work paying off the loan will have a positive impact on your credit scores.
How we picked these loans
We looked at 10 lenders to narrow this list down to our picks for the best credit-builder loans. We compared each lender based on a variety of factors, including loan amounts, accessibility, fees, rates and additional perks offered.