A credit-builder loan reverses the usual order: you make the payments first and get the money at the end.
Quick summary
- With a credit-builder loan, the lender holds the loan amount in an account while you make payments.
- Your payments are reported to the credit bureaus, building a payment history.
- You receive the money, sometimes with interest earned, once the loan is repaid.
- Late payments are reported too, so only take one on if the payment fits your budget.
Most loans give you money upfront and then ask you to repay it. A credit-builder loan works the other way around, which is why lenders can offer it to people with no credit history.
How it works
- You choose a small loan amount and a term.
- The lender puts that amount in a locked savings account or certificate.
- You make fixed monthly payments.
- The lender reports your payments to the credit bureaus.
- When the loan is repaid, the money is released to you.
What it costs
You’ll usually pay interest and sometimes an application or administration fee. Some lenders pay a little interest on the locked savings, which offsets part of the cost. Compare the annual percentage rate (APR) and fees, not just the monthly payment.
| Credit-builder loan | Secured credit card | |
|---|---|---|
| Money upfront | None; you get it at the end | A deposit, usually returned when you close or upgrade |
| Type of credit | Installment | Revolving |
| Main cost | Interest and fees | Annual fee and interest if you carry a balance |
| Helps with | Payment history, credit mix | Payment history, utilization |
Quick tip
Choose a payment you could make even in a tight month. A credit-builder loan with one missed payment can do more harm than good.
Who it suits
- people with no credit history who want to start one
- people rebuilding after past problems who want a fresh record of on-time payments
- anyone who’d also like to finish with some savings
It’s less useful if you already have several active accounts, or if you’d struggle to commit to the payment for the full term.
Red flag
If you stop paying, the lender may close the loan, keep the savings to cover what’s owed and report the late payments. That can lower your score.
Weighing it up
A credit-builder loan and a secured card do similar jobs in different ways, and some people use both. Pair either one with good habits, like those in our guide to building credit from scratch, and check your progress with free reports at AnnualCreditReport.com.
Reader questions
How much can I borrow with a credit-builder loan?
They’re usually small, often a few hundred to a couple of thousand dollars, repaid over six months to two years.
Where can I get one?
Credit unions, community banks and some online lenders offer them. Check that the lender reports to all three nationwide credit bureaus.
Will it help if I already have credit?
It can add an installment account to your mix, but the benefit is usually biggest for people with little or no credit history.
This article is general information, not financial or legal advice. Scoring models, lender policies and laws change, and state rules vary. Check official sources such as the Consumer Financial Protection Bureau and the Federal Trade Commission, and consider a nonprofit credit counselor for help with your own situation.