What is a Credit Builder Loan and Do They Work?

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A credit builder loan is a loan offered by a community bank or credit union that helps you rebuild credit or establish credit for the first time. Usually, you don’t need a good credit score—or even any score at all—to apply for one.

How Do Credit Builder Loans Work?

Credit builder loans allow you to borrow a sum of money that you can access only after you have paid off the full amount. This allows you to make consistent, on-time repayments that can help boost your credit score.

This is a low-risk way for lenders to lend you money while giving borrowers with poor or no credit history the ability to build credit. The loan amount can be as low as $300 and as high as $5,000 depending on the source of the loan. It’s held in a locked savings account while you pay it back over 6 – 24 months.

The positive payment history is reported to the three major credit bureaus: Experian, TransUnion and Equifax. Once the loan is paid off, the money is yours. Sometimes, the interest you paid is refunded, too.

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How Do Credit Builders Help My Credit Score?

Credit builder loan repayments are reported to the credit bureaus, demonstrating that you’re a responsible borrower.

If you’re just starting out and have no credit history, you’ll receive a FICO® score after around six months. Your score is likely to start out quite high because you have no bad credit history.

If you already have a credit score, you should expect to see an increase with a credit builder loan. Payment history makes up 35 percent of a person’s FICO® credit score. Making on-time monthly payments can have a truly positive impact.

Pros and Cons of Credit Builder Loans

There are several advantages of a credit builder loan over a personal loan, but there are also some downsides to consider. Take a look at our list of pros and cons below.


  • A credit builder loan is easier to get than an unsecured personal loan. The lender keeps the money until you’ve paid it back, so they see you as less of a risk.
  • You don’t need a glowing credit report to get one. When applying, your income and bank accounts are checked, rather than your credit history.
  • Paying back the loan in advance helps you develop good financial habits. This is crucial for building a good credit score.
  • You’ll improve your credit score and have the moneyyou saved. After you’ve completed payments, you’ll receive the money.


  • Interest rates on credit builder loans can be quite high. Shop around to find the best rates.
  • Some lenders may be too small to report to all three major credit bureaus. Try to find one that reports to all three, as this will give you the best chance of improving your score.
  • You’ll need to become a member to get a credit builder loan offered by a credit union. This usually isn’t difficult but is something to be aware of.

How Do I Get a Credit Builder Loan?

To apply for a credit builder loan, some typical requirements; you’ll need to be at least 18, have a bank account, a social security number and proof of income. Make sure to shop around when looking for a loan because rates and terms vary.

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Here are important aspects to consider:

  • Make sure the loan has a good interest rate. Some lenders also refund the interest to you if you pay off the loan successfully.
  • Check that the loan will be reported to as many of the credit bureaus as possible, ideally all three.
  • Check for other terms and conditions. Some organizations require you to take workshops or classes in financial literacy while you pay off the loan.

Who Offers Credit Builder Loans?

Credit builder loans are offered by many financial institutions, including credit unions and banks. You won’t find them through the big banks, as credit builder loans aren’t profitable enough and they’re rarely advertised.

  • Credit unions: To get a loan from a credit union you need to become a member. Typically, you must live in the area where the credit union is based, or be employed by a certain company. You might also need to pay a membership fee.
  • Community banks: Community banks that focus on the banking needs of people in a local area may also offer credit builder loans. 
  • Financial technology companies: Finance companies are becoming aware of the benefits of offering credit builder loans. Self, based in Austin, is an example of a start-up that offers these loans. You can apply online and track your loan via an app.

How Much Does it Cost?

Fees, interest rates and loan amounts—as well as the terms of repayment—vary from lender to lender.

  • Fees: Often there’s an administration fee of $8 – $15 to activate the account. There may also be late fees if you miss a payment.
  • Interest rates: Interest rates vary depending on the lender but can be as low as 15.92 percent or as high as 36 percent. 
  • Payments: You’ll need to put money each month toward making payments. On a loan of $1,000 over 12 months at an APR of six percent, 12 installments would be around $86.08 each.

How Else Can I Build Credit?

A credit builder loan isn’t the only way to build credit. Other options include:

  • Get a secured credit card: A secured credit card requires you to make a cash deposit before you use the card. Like a credit builder loan, payments are reported to the credit bureaus, helping you build a positive credit history with on-time payments.

    Interest rates are typically quite high, though. But if you make a certain number of payments on time, with many issuers you’ll be eligible for a credit limit increase or an unsecured card with the same company.

  • Report your rent: Your landlord may be able to report your rent to the credit bureaus or you can join a service that reports it for you, for a small fee.

  • Become an authorized user: A low-risk way of building credit is to become an authorized user on someone else’s credit card. If you have a friend or family member who’s willing to add you to their credit card, any payments will appear on your credit history. 

  • Join a lending circle: Lending circles are a form of informal borrowing where a group of people pools money to create a loan, which is then lent out to one person at a time. Payment activity is reported to the credit bureaus.

How Can Credit Repair Help Me Build Credit?

An easy way to improve your credit score is to take a good look at your credit report for any mistakes or outdated information. These negative marks can unfairly bring down your credit score. 

Through credit repair, you can dispute these inaccuracies and have them removed from your credit report. Having an accurate credit report can boost your credit score and the likelihood of getting approved for credit cards and loans. Contact Lexington Law today to learn how credit repair can help you.