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What Is A Credit Builder Loan (CBL)
How It Works & Who Offers Them
It is very common to be unsure of the first steps you should take to start building or rebuilding your credit but a safe step to consider is a Credit Builder Loan.
A Credit Builder loan is an excellent way to start building credit because they are low cost and there is no credit check.
This is a definitive guide to Credit-Builder Loans and aims at answering the most commonly googled questions, including; ‘What is a Credit-Builder Loan?’, ‘How Credit-Builder Loans work?’, and ‘Who offers Credit-Builder Loans’?.
For a real step-by-step guide on how to quickly build your credit, check out our '90 Day Credit Sprint'.
Definitive Guide To
Credit Builder Loans Most Googled Questions
What Is A Credit Builder Loan?
A Credit Builder Loan is a small loan that the bank puts in a savings account or CD for you.
Upon making your final payment, you will have access to the entire loan amount, less any fees and interest charged.
It's the perfect loan for people with Bad Credit, No Credit, New to Credit, Poor Credit, or looking to Build Credit; because the cost is low, there is no credit check, and your monthly payments are reported to the three big credit bureaus.
The payments are reported to the three major credit bureaus which will help your payment history and should help build your credit.
Credit-Builder Loans are a lesser known tool that work great for people with Bad Credit, No Credit, New to Credit, Poor Credit, or looking to Build Credit..
This is one of only a few credit building options that is available with no credit check.
How Does A Credit Builder Loan Work?
Well, I know my English teacher used to say, 'never answer a question with a question,' but...
Have you ever put something in ‘Layaway’ at a store?
I think the easiest way to understand how a Credit Builder Loan works, is to think about the loan like a ‘Layaway’ option.
Shop now, pick out what you want and then go to the ‘Layaway’ counter in the back of the store.
You pay a small down payment and they put the products in the back for safe keeping.
You make regular payments for your 'Layaway' items and when you make the final payment, you get to take them home.
Credit Builder loans work pretty much the same way as 'Layaway'!
The lender gives you a loan but you don't get access to the money until you make all of the payments.
You identify the amount of the Credit-Builder loan you want and the payment terms you can afford.
Just make a small down payment, usually equivalent to one monthly payment, and they put the loan away for safe keeping (I’m talking figuratively here).
You make regular small monthly payments to the lender who then reports those payments to the three big credit agencies.
When you make the final payment, you will get access to your entire loan amount, less any fees and interest the lender charged you.
Just like ‘Layaway’!
Except, unlike layaway, Credit Builder Loans are a great tool to build your credit and improve your payment history, if you make all your payments on time.
And, instead of taking home a bunch of stuff that you probably didn’t need in the first place, you will receive your loan amount in one lump sum.
Is A Credit Builder Loan Right For You?
A Credit Builder Loan is a great credit building option for people just starting on their credit journey or people who drove their credit off a cliff and are now trying to climb back up (hello fellow cliff climbers).
When you apply for a Credit Builder Loan, there is no credit check, so that the loan will have minimal effects to your credit score.
As long as you make your payments on time, you will gain some valuable credit payment history.
You will also vary your credit mix (credit cards, personal loans, mortgages, etc.) at minimal cost to you.
But, because of the nature of these loans, they do cost you a little bit of money.
At the end of the terms, the total amount of money you have paid to the lender will be more than the amount of the loan you receive upon completing your payment terms.
The great thing about this type of new credit is that the actual cost to you is inexpensive for the value of the credit it gives.
However, if you have a credit score of over 675, this product probably isn’t necessary since the loan will cost you some money.
If you are looking to generate more payment history, you’d be better off, in most cases pursuing unsecured credit like a credit card or personal loan at a much lower interest rate.
Will A Credit Builder Loan Improve Your Credit Score?
Credit Builder Loans are a great credit building tool that when paid on-time will increase your credit history.
Here’s the deal...
If you have Bad Credit, No Credit, New to Credit, Poor Credit, or looking to Build Credit and you receive a Credit Builder Loan and make regular payments, it can't hurt your credit.
What do we know about credit scores?
We know that your payment history plays a significant factor in determining your credit score, as much as 35%.
So, if we can have loan payments reported for a year or two on a Credit Builder Loan, it is going to increase your payment history.
Better payment history can directly affect your credit score...
We’ve heard stories of peoples credit scores increasing over 100 points... which seems possible, especially for people with absolutely NO credit history.
Here’s the one thing you DON'T want to do... MAKE A LATE PAYMENT ON YOUR CREDIT BUILDER LOAN.
That would be a real knucklehead move which could lower your credit score and ultimately defeat the purpose of you getting a Credit-Builder loan.
How Much Does A Credit Builder Loan Cost?
The cost of a Credit Builder Loan depends on each individual lender and the terms they are offering.
Keep an eye out for the following key terms when comparing lenders offers.
APR Interest Amount
The APR, aka Annual Percentage Rate, is the annual interest rate charged for borrowing money.
The APR is the actual cost of borrowing over a given year expressed as an interest rate.
Kind of confusing right?!?!
Here’s what you need to know...
The lower the APR is, the better, because that means you are paying less interest on the money you borrowed.
Low APR’s good, high APR’s cost you more money.
The lender with the lower APR is charging you less interest for the loan they are offering you.
Some of the Credit-Builder loans don’t charge an interest rate, some charge a high-interest rate and then return half of that interest, if you make all your payments on time.
There is no one set way that these loans are structured.
Do your research, so you know the interest payments you will be making on each possible loan.
Other Fees And Costs
Some lenders require a startup fee, loan origination fee, application fee, processing fee and/or can charge additional money for late payments.
Make sure you know all of the costs associated with the loan so you can make a more informed decision.
The Loan Repayment Terms
Keep in mind that the longer you take to repay a loan the more money you will pay the lender in interest.
Each month that you make a payment on your loan, only a portion of that payment goes to the principal of the loan (aka the balance still owed).
The rest of the money goes towards interest which the bank keeps as a profit.
The longer you make payments, the more interest you will pay.
Choose your loan repayment terms accordingly.
Maximum And Minimum Loan Limits
Generally, most Credit-Builder Loans have a minimum and maximum loan limit of $500 to $3,000.
Remember that the size of the loan determines the interest you pay on that loan.
You will pay much more interest on a $3,000 loan then you will on a $500 loan.
Keep that in mind when you are comparing your options.
Credit Builder Loan
No Credit Check
Improves Payment History
Credit Building Tool
Most People Qualify
Big Chunk Of Money At The End
Creating Good Payment/Savings Habits
Adds To Your Credit Mix
Forced Savings Account
Have To Make A Monthly Payment On Time
What to watch out for With Credit Builder Loans?
Actual Loan Costs
There can be many fees associated with any loan and Credit Builder Loans are no different.
You need to know how much the loan is costing you to make an informed decision on the best option for you.
Keep a close eye on the fees to start the loan, APR rates, and the monthly payment terms.
Knowing these key terms will help you make a solid final decision.
Fresh Start Loans
We have seen unsecured personal loans advertised under the Credit Builder Loan section as Fresh Start Loans.
Credit-Builder Loans are a relatively new opportunity for people to build their credit.
Fresh Start Loans are a name that is used very loosely and generally ARE NOT Credit-Builder Loans.
If the advertisement says that you will get money up front, it is probably not a loan you will qualify for if you have no credit or bad credit.
Make sure you thoroughly investigate any Fresh Start Loan you are considering.
Starting Over Loans
I have seen this term only a couple of times while researching Credit-Building Loans.
Starting Over Loans are targeted at people with bad credit with insanely high-interest rates.
Similar to Fresh Start Loans, the term 'Starting Over Loans' has no specific industry meaning and can be used for a wide range of personal type loans.
Again, just like Fresh Start Loans, make sure that you do your research before purchasing.
Sometimes people confuse Pledge Loans with Credit-Builder Loans.
On the face, they can look similar, but in reality and function, they are not.
A Pledge Loan is a secured personal loan.
A borrower will pledge a CD (Certificate of Deposit) as collateral, and in return, a Credit Union (I have only ever seen Credit Unions use the term Pledge Loan) will give a loan up to the amount in the CD pledged.
This is much different than a Credit-Builder Loan because you do not have to put up any collateral for a CBL.
These are still an excellent way to build credit, but you have to have collateral to pledge, unlike Credit-Builder Loans where you make a small upfront payment and regular small monthly payments.
Where To Find A Credit Builder Loan?
Did you know that your local credit union may offer a Credit-Builder Loan?
Approximately 15% of Credit Unions provide them. If you belong to a Credit Union that offers Credit-Builder Loans, you are in luck!
They usually offer them with little to no startup costs, low APR rates, and friendly terms.
The problem is that you have to be a member of the Credit Union to qualify for their CBL.
Some Credit Unions allow membership based on where you live, where you work, military status or associations you belong too.
Be sure to check with your local Credit Union to see if you qualify.
Occasionally, you will come across a local bank that offers Credit-Building Loans.
Just like the Credit Unions, they offer excellent terms that are hard to beat.
Unfortunately, they don’t usually advertise these loans, and you have to get lucky for your local bank to offer a Credit-Builder Loan.
One positive thing about the local banks offering CBLs is that you won’t have to qualify to be a member of the bank, unlike the Credit Unions.
CDFI's (Community Development Financial Institution)
In many bigger cities, you will find CDFI’s that exist to help increase the financial fluency and power of lower-income neighborhoods.
These CDFI’s will offer Credit-Builder Loans to people located in their community at very low rates and excellent payment terms.
Check with your local Community Development Financial Institution to see if they offer a Credit-Builder Loan program.
You often find lending circles working within local communities with the goal of credit building.
The way they work is that a group of people each pay a set amount each month into a financial institutionally regulated account.
One of the people in your 'Lending Circle' each month is pre-selected to receive that entire month's payment from all of the members.
Each member takes their fair turn, and the financial institution organizing the circle reports your payments to the three major credit bureaus.
Some of these Credit-Building Loan programs will cost you almost nothing and not charge you an interest rate. Check with local financial institutions about a lending circle in your area.
Online National Lenders
The majority of people can quickly and easily obtain a Credit-Builder Loan online from the comfort of their couch.
Self Lender is the nationally recognized Credit-Building Loan lender in the U.S. You can sign up for a Credit-Builder Loan in literally a couple of minutes online, and their costs are very competitive.
You may be able to save a few dollars finding a Credit Union or Lending Circle in your area, but it may take you days, months or years to find that savings.
After searching for a Credit-Builder Loan for me, I decided on using Self Lender because the overall extra cost for a year compared to local options was under $40, and I was able to sign up sitting in my underwear, eating popcorn at my desk.
It is that easy.
How to get a credit builder loan?
Find A Credit Builder Loan Lender
Whether you look into a Credit Union, Local Bank, CDFI, or Self Lender, identifying your Credit-Builder Loan lender options are your first step.
Decide How Much To Borrow
You don’t need to borrow a significant amount.
Keep in mind the more you borrow the more you will pay in interest.
You are trying to establish a payment history, but it is also sort of like a forced savings account so if you have a big purchase in mind that you need to save up for...why not kill two birds with one stone?
Compare Credit Builder Loan Lender Costs
You need to identify the possible Credit-Builder Loan lenders and then look at their costs and terms.
How much are their APR, costs for the loan, payment terms, and are there any penalties?
Apply For The Loan
Once you determine which Credit-Builder Loan is best for you, go ahead and apply with confidence.
Make All Payments On Time
If accepted, remember the whole point of getting a Credit-Builder Loan is to establish a good payment history with the big three credit bureaus.
So, DO NOT make any late payments! Let me say that one more time, NO LATE PAYMENTS!
Monitor Your Credit Score
Now that you are actively pursuing a better credit score, it is time for you to start monitoring it.
There are multiple options for credit monitoring services that can help you stay on top of your credit.
Don't Rush Repayment
Again, unlike any other loan program, this is the one you want to make every payment on time, but you don't want to pay off the loan early.
Remember, you signed up for a Credit-Building Loan to help your payment history look better on your credit score.
Paying the loan off early will completely defeat this purpose.
Make All Payments
Once you make that final loan payment, you will have access to the entire sum that you paid the lender, less any interest and fees charged.
Other Options For Building Credit
Secured Credit Cards
A secured credit card is a great option to build credit for people with Bad Credit, No Credit, New to Credit, Poor Credit, or looking to Build Credit.
They work just like a regular credit card except the credit card company requires a deposit from you.
The credit limit they issue is usually equal to the amount of money you deposited with the credit card company.
Just like a regular credit card, your payments are reported to the big three credit bureaus along with increasing your overall available credit.
Student Credit Cards
These cards are great if you qualify for them by being an active college student.
They are designed for people with no or limited credit and usually start with very low credit limits.
Unlike secured credit cards, they do not require a deposit and are a great way to start building your credit for college students.
Secured Personal Loan
Generally speaking, a secured personal loan requires you to assign some collateral of value more than the loan value, to the bank.
Usually, you think of auto loans when we think of secured personal loans.
A lien is placed against the title to your vehicle by the bank to secure the collateral.
You make monthly payments to the lender per the terms of the loan.
If you fail to meet the conditions and stop making the payments, the lender can take the collateral (your whip in this instance) and sell it to repay your loan.
Lenders are more willing to take a risk and lend money to people with lower credit when they have collateral valued more than the requested loan amount.
Another excellent credit building option is to sign up for rent reporting.
If you have a lease or rent a property, then you are eligible to have your monthly payments reported to the three credit reporting bureaus.
In most instances, the initial start cost is under $100, and then the monthly fee to report your payments to the credit bureaus is under $10 a month.
Rent Reporting is an easy and inexpensive way to establish a payment history with the credit bureaus.
Authorized User On Another Account
The authorized user hack still works with credit reporting agencies.
Here’s what you need to know and do.
Contact a family member or good friend with excellent credit and a long credit history (think Grandparents, Parents, Aunts, Uncles, etc.).
Ask them to add you to their credit cards that they have had the longest as an authorized user.
They will have to call and give the credit card companies your social security number and date of birth.
Eventually, their credit card history and credit limit will show up on your credit history and help your credit score improve.
No Credit? Bad Credit?
Avoid These Commonly Recommended Credit Options!
The following common credit-building options may not be the best options for you if you have Bad Credit, No Credit, New to Credit, Poor Credit, or looking to Build Credit.
These options usually require a higher credit score for you to qualify and be accepted.
It is critical that when you apply for new credit, you do not get declined.
When applying for new credit, the company will perform a ‘hard pull’ inquiry on your credit which is reported to the three major credit reporting bureaus.
This inquiry is the company checking your credit history and credit score through the big three bureaus.
One factor in determining your credit score is the number of inquiries you have made for new credit.
If you have too many inquiries in a period of time, then your credit score can be negatively affected.
If you apply for new credit and you get declined...it is like a double punch to the gut!
Failing to get the new credit (which often offsets the inquiry credit score deduction) leaves you with a new credit inquiry with nothing to show for it.
If you are reading ‘How To Build Credit’ on our competitor’s websites, they will recommend these products regularly to their readers.
If you have fair to good credit, they are excellent options for new credit lines, but if you have limited credit, no credit or bad credit, these types of credit lines will need to wait until you improve your credit score.
Consequently, be absolutely sure you will qualify and not be declined for the following credit options when applying for a(n):
Self - Lender: The Best Online Credit Builder Loan
As we have discussed, there are multiple options out there for you to get a Credit Builder Loan.
We feel like the best Credit-Builder Loan online is with Self Lender.
First, Self Lender offers various loan amounts and loan terms.
You will have a variety of monthly payment options starting as low as $25 per month.
Their APR is competitive and the cost to start any of the loan programs is under $20.
Plus, it is so stinking easy to sign up for a Self Lender Credit Builder Loan.
I have a Self Lender Credit-Builder Loan that I signed up for in under 5 minutes from start to finish, including reading all the fine print.
To learn more about Self Lender and their Credit-Builder Loans, read my Self Lender Review!
Mark B. Huntley, a personal finance writer who has contributed to such publications as Forbes, is a former finance and consumer advocates attorney who lost everything in the real estate crash in the late 2000s. Credit Knocks was inspired by the trials of his credit building experience and the desire to help others understand the easy steps necessary to improve one’s credit score.