What is a credit builder loan

credit builder loan

A credit-builder loan is when a lender puts a specified amount of money into an account, and then the borrower makes fixed monthly payments until the borrower repays the full amount. The money paid is returned upon completion, which makes a credit-builder loan more like a savings account than an actual loan. 

Unfortunately, only about 1 in 6 American consumers have an 800 credit score or higher.1 But the good news is that credit-builder loans are a good way to save money while also improving your FICO Score. It can allow you to establish a record of on-time payments without having to take out an actual loan or open a credit card.  

What Is Your Credit Score, and How Does It Work?

If you’re curious about a credit-builder loan, then you’re probably trying to find ways to improve your creditworthiness. But what exactly is a credit score, how does it work, and what does it mean for your financial life? These are all great questions that need to be answered if you want to be financially independent. 

A credit score is a three-digit number representing your financial trustworthiness. Several companies track your financial behavior and assign you a number based on how well you manage your money. This means lenders look at your credit score to determine whether or not to work with you. 

How Will Your Credit Score Affect You?

A good credit score means better interest rates and more favorable terms and conditions. A poor credit score means you may have trouble being approved for loans. And if you are approved, you likely won’t receive excellent interest rates or terms. 

It may sound backward, but having a low credit score can be pretty expensive. It means high interest rates, which means you end up paying a lot more over time for things like loans, credit cards, mortgages, etc. So, the best way to improve your financial situation is to start with your credit score. 

High interest rates and unreasonable repayment conditions can make it nearly impossible for low-credit borrowers to get the money they need. But the reason these lenders offer terms like these is because they are taking on more risk than they would be with a good credit borrower. To make up for this added risk, they increase their rates. 

How Do The Credit Bureaus Determine Your Credit Scores?

There are three major credit bureaus: Experian, Equifax, and TransUnion. And you will likely have a credit score with each of them. They all compile your financial information into a document called a “credit report.” This report is what they use to determine your three-digit credit scores.

Your score is determined by a handful of financial behaviors, each with its own weight on the overall score. Here’s what they’re looking for: 

  • 35% of your score is determined by your payment history
  • 30% of your score is based on the total amounts you owe
  • 15% of it is based on the length of your credit history
  • 10% is based on new credit accounts opened
  • 10% is based on your “credit mix” or how varied your open accounts are 

As you can see, the most important factor is your payment history. If you have a good history of paying your bills on time, you will likely have a decent credit score with each of the credit bureaus. This is why it’s so important to always pay your bills on time. It can drastically reduce your overall credit score. 

This is also why a credit-builder loan can help you improve your score over time. Credit-builder loans are designed to do precisely what their name implies: build your credit. 

What Is Good Credit?

The most common credit scoring model is the FICO score. This model scores borrowers on a scale between 300 and 850. 

Here’s how lenders view borrowers based on where they land on this scale: 

Credit Score RangeCredit Rating
300–580Poor Credit
580–669Fair Credit
670–739Good Credit
740–799Very Good Credit
800–850Excellent Credit

Keep these scores in mind as you work to improve your credit. Build good financial habits, and you’ll watch your score slowly climb the credit ladder. 

How Do Credit-Builder Loans Work?

Your specific credit-builder loan will depend on the lender that you choose. So make sure you ask plenty of questions before you sign for one. But in general, they work like this: 

  • Once you find the credit-builder loan and lender you want, you’ll fill out an application. 
  • The lender will likely look at your personal and financial information, including banking information, to determine whether you qualify. 
  • If you are approved, you will find out how much you qualify for. In some cases, amounts may range from a few hundred dollars up to a thousand dollars. 
  • You will then make payments to the lender over the course of a few months or even a couple of years, depending on the loan in question. 
  • Once you complete all of your payments, the lender will return all of the money to you. But you’ll need to find out from the lender whether or not the interest will be returned as well. 
  • At this point, you’ve completed the loan agreement, and now you have a solid bank account with emergency savings and potentially a higher credit score. 

Keep in mind that this process will largely depend on your specific credit-builder loan and may differ from lender to lender. 

Where Can You Find Credit-Builder Loans?

A credit-builder loan can be found at many of the same places you would find traditional loans. 

One place you can find credit-builder loans, as well as traditional loans and other financial products would be a credit union. Credit unions are like banks, but they are non-profit organizations that focus more on their members. Because of this, you may be able to get better interest rates at credit unions. 

You can also find credit-builder loans through online lenders. This is often many people’s preferred method, as you won’t have to leave home to research lenders, apply, and receive approval. 

Some banks may also offer credit-builder loans. You may have more luck with smaller community banks. If you want to go this route, simply call around to find out if any banks in your area offer credit-builder loans. 

Other Ways to Improve Your Credit History

A credit-builder loan is not the only way to improve your credit report and credit scores. There are plenty of other ways to build credit, such as using a share-secured loan

Here are a few of the most common options that could help you build credit. 

Secured Credit Cards

A secured credit card is one way for someone with no credit history to begin to build one. For this credit card, you would be required to put money into an account, and then you can spend up to that amount using your card. 

The amount you put on the card acts as collateral in case you don’t make your payments. A secured credit card is a safer option than a regular credit card for someone looking to build credit. 

Unsecured Credit Cards

Traditional unsecured credit cards can also help you build credit. As long as you always make your payments on time, you should begin to see your credit score improve. 

The difference between this card and a secured card is that you won’t be required to offer up any collateral. This can be good or bad. It’s good because you can get one without offering any money. But it can be dangerous for some borrowers if their spending gets out of control. Credit card debt can rack up quickly, so be conscious of your spending if you use one. 

Personal Loans

A personal loan or traditional bank loan can also improve your credit if you make your monthly payments on time. Essentially, any loan or financial product can improve your credit if you pay on time and your payments are reported to the credit bureaus. 

Personal loans are installment loans that you pay off monthly, over several months, or even over a couple of years in some cases. You can find them through banks, credit unions, or at other storefront locations. And if you want convenience, know that many personal lenders offer online loans with direct deposit. 

FAQS: How Does a Credit Builder Loan Work 

How long does it typically take to see an improvement in my credit score with a credit builder loan?

The time it takes to see an improvement in your credit score with a credit builder loan can vary, but typically, borrowers may start to see a positive impact on their credit scores within six months to a year of consistent, positive payment history with their credit builder loan.

Is a credit builder loan available to individuals with no credit history or payment history?

Yes, credit builder loans are specifically designed for individuals with no credit history or those looking to rebuild their credit. They are an effective tool for establishing a credit record. You can start with online lenders for more selection, or you may be able to turn to more traditional lenders such as credit unions, community banks, or commercial banks.

What happens if I miss a payment on my credit builder loan?

Missing a payment on a credit builder loan can negatively impact your credit score. It’s important to contact your lender immediately if you anticipate difficulty in making a payment, as some may offer flexible solutions.

Can I pay off my credit builder loan early, and will it affect my credit score?

Many credit builder loans allow early repayment without penalties. Paying off early can positively impact your credit score, as it demonstrates financial responsibility, but it may shorten the length of your credit history, which is also a factor in credit scoring.

Is there a minimum or maximum amount for credit builder loans?

The amount for credit builder loans can vary depending on the lender. Typically, these loans range from a few hundred to a few thousand dollars.

How do credit builder loans differ from secured credit cards?

Credit builder loans do not provide immediate funds for use but rather lock away a sum of money that is accessible after the loan is repaid. In contrast, secured credit cards require a deposit that serves as your credit limit and can be used for purchases immediately.

Are there any fees associated with credit builder loans?

Some credit builder loans may have associated fees, such as administrative fees or interest charges. It’s important to review the terms and conditions of the loan to understand any applicable fees.

How does a credit builder loan from a credit union differ from a traditional loan in terms of improving my credit score?

A credit builder loan from a credit union focuses specifically on helping you build credit. Unlike a traditional loan, the lender places the loan amount in a savings account, and you make monthly payments until the loan term is complete. This process helps establish a consistent payment history, crucial for credit improvement.

If I have existing debt, can one of these loans still help me improve my credit score?

Yes, a credit builder loan can still be beneficial to build credit even if you have existing debt. By making regular monthly payments on the loan term, you demonstrate financial responsibility, which can positively impact your credit score, complementing your efforts to manage existing debt.

What are the advantages of choosing one of these loans over a personal loan for someone looking to build credit?

The main advantage of a credit builder loan over a personal loan is that it’s specifically designed to help build credit. The structure of making monthly payments over the loan term and then receiving the total amount back mimics a savings account, making it a safer option for those new to credit or looking to improve their score without the immediate burden of traditional loan debt.

How much is the typical credit builder loan cost, and how do they compare to traditional loans?

The costs associated with a credit builder loan can vary depending on the lender, but they generally include interest charges and may have administrative fees. The interest rates are often lower compared to traditional personal loans, as the risk to the lender is reduced by the nature of the loan.

What CreditNinja Wants You To Know About Credit-Builder Loans 

A credit-builder loan is just one option for practicing good financial habits and building your credit score and savings account. A credit-builder loan might be wise if you don’t have a credit score yet because you’re young or you haven’t had any credit accounts. 

As with any type of loan, you’ll want to research lenders to ensure you’re finding the right one for your specific situation. One option to consider is a CreditNinja personal loan. Eligible borrowers can receive competitive rates, quality customer service, and other exclusive perks. 

Learn more about unsecured loans, the three major credit bureaus, building credit, and credit reports through the CreditNinja Dojo! 


  1. What people with 800+ credit scores have in common  |  WTOP News
  2. What’s In Your Credit Score | myFICO
  3. What Is a Credit Builder Loan?  |  Experian
  4. What is a FICO Score and why is it important?  |  myFICO

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