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Working on building your credit score is one of the most important things you can do for your finances. Lenders use your credit score to determine whether you’re a trustworthy borrower, so a bad credit score could mean you won’t be able to gain access to certain financial products.
By comparing the best credit builder loans below, you can get started on your path towards a new and improved credit score.
In this guide:
- What Are Credit Builder Loans?
- Best Credit Builder Loans
- The Risks of Credit Builder Loans
- Tips for Using Credit Builder Loans to Improve Your Credit
- Other Ways to Improve Your Credit
What Are Credit Builder Loans?
Credit builder loans are loans with an easy approval process that are designed specifically for people who need to build credit because they don’t yet have a strong credit history or because they have had problems with their credit in the past.
In most cases, when you take out a credit builder loan, you borrow between $300 and $1,000 — but the catch is that you don’t actually get access to the funds until you’ve already paid the full loan amount back.
The money you borrow is put into a savings account for you. You’ll make monthly payments based on your interest rate and amount borrowed, and the lender will report your monthly payments to the three credit bureaus — Equifax, Experian, and TransUnion. Once you’ve paid back the entire borrowed amount, you’ll be given the funds that the lender deposited into your savings account.
In other cases, you’ll be given the borrowed funds right away — but need to have the borrowed amount of money invested in a savings account that serves as a security deposit for the credit builder loan. In rare cases, you can also get a loan and access the funds right away, without putting money into an account that serves as collateral. These types of loans are usually for very small amounts, and the loan rate is often higher.
Because you pay back the loan before you gain access to the money — or because your loan is secured by cash in your savings account — there’s no risk to the lender giving you a credit builder loan. These loans encourage you to save money while building credit since you end up with a nest egg in your bank account at the end once you’ve paid back the loan amount and get access to your borrowed funds.
Chime is a financial technology company, not a bank. Banking services and debit card provided by The Bancorp Bank or Stride Bank, N.A.; Members FDIC. Credit Builder card issued by Stride Bank, N.A.
On-time payment history can have a positive impact on your credit score. Late payment may negatively impact your credit score. Chime will report your activities to Transunion®, Experian®, and Equifax®. Impact on your credit may vary, as Credit scores are independently determined by credit bureaus based on a number of factors including the financial decisions you make with other financial services organizations.
Best Credit Builder Loans
Many financial institutions offer credit builder loans, including banks, credit unions, and online lenders. These loans can have different interest rates, loan amounts, fees, and loan payment rules. It’s important to compare your options to make sure you find an affordable loan that reports to the credit reporting agencies and that charges minimal interest and few or no fees.
Best Credit Builder Loans from Banks and Online Lenders
Here are some top-rated banks and online lenders that offer credit builder loans.
1) Republic Bank
Republic Bank has a C- BBB rating. They claim that their Credit Builder program may improve your credit score in as little as 12 months, but note that this is not guaranteed. The money you borrow will be placed into a certificate of deposit (CD) where it will earn interest during repayment. You can learn more about the Republic Bank credit builder loan on their website.
- LendEDU Rating: 4.21/5
- Loan Amount: $500 – $1,500
- Term Length: 12, 18, or 24 months
2) Heartland Bank
Heartland Bank has a A+ BBB rating. The Heartland Bank credit builder loan is part of the bank’s Small Dollar Loan Program. This program is designed to assist you in building or repairing your personal credit. Your funds will be placed into a Heartland Bank Simply Savings Account where you will earn interest during repayment. To learn more about this product, check out their website.
- LendEDU Rating: 3.74/5
- Loan Amount: $500 – $1,500
- Term Length: Not provided
Self, formerly known as Self Lender, received a B rating with the BBB. The website is interactive and allows you to see how different monthly commitments change the overall cost of your loan. The loan is FDIC insured1 and you can pay off or close your account early. To learn more about the Self credit build loan, check out its website.
- LendEDU Rating: 3.70/5
- Total amount of payments: $600 – $1,800
- Term Length: 12 – 24 months2
Best Credit Union Credit Builder Loans
Here are some top-rated credit unions that offer credit builder loans.
1) Metro Credit Union
Metro Credit Union has a A+ BBB rating and comes in as the highest rated credit builder loan rated by LendEDU. Loan funds will be deposited into a Metro Savings account where it will earn dividends during the selected term. You can learn more about the Metro Credit Union credit builder loan on its website, here.
- LendEDU Rating: 5/5
- Loan Amount: $500 – $3,000
- Term Length: Up to 24 months
2) Digital Federal Credit Union
Digital Federal Credit Union (DCU) received a A BBB rating. You’ll earn dividends through a DCU Savings account during repayment. The DCU credit builder loan has a rating of 3 out of 5 stars on the DCU website. You can check out these reviews on its website.
- LendEDU Rating: 4.79/5
- Loan Amount: $500 – $3,000
- Term Length: 12 – 24 months
3) USALLIANCE Financial Credit Union
USALLIANCE Financial Credit Union received a A+ BBB rating. You’ll receive the published rates as long as you enroll in automatic payments. If you don’t, the interest rate is increased by 0.25%. To learn more about the USALLIANCE Financial credit builder loan, check out its website.
- LendEDU Rating: 4.75/5
- Loan Amount: $500 – $2,000
- Term Length: 12 – 24 months
The Risks of Credit Builder Loans
Credit building loans have undeniable advantages, in that they can help you to develop a positive payment history when you might otherwise be unable to do so. Even so, there are risks associated with these loans too. Here are some of the biggest issues you’ll face.
- You could hurt your credit if you don’t pay on time: The point of a credit builder loan is to improve your credit score, but this will backfire if you fail to make on-time payments or if you miss your payment due date altogether. You should not take out a credit builder loan unless you are confident that you’re ready to pay your loan when it is due.
- You could end up paying high fees: Some credit builder loans charge application fees. If you do not pay your bill by the due date, you will likely also need to pay a late fee. These fees could add significant costs.
- You may pay interest on money you don’t yet have access to: In most cases, the interest rates on credit builder loans are under 10%. But, that’s not always the case. And, paying any interest on money that you cannot access until the loan is repaid can be frustrating because you may feel as though it is a waste of money.
You can mitigate these risks by making a budget that factors in your monthly payments before borrowing, and by shopping around for a lender that offers the most affordable loans possible. Some lenders will even refund the interest you pay as long as you pay back the loan on time.
Tips for Using Credit Builder loans to Improve Your Credit
As mentioned above, credit builder loans can help your credit – but they could also hurt it if you don’t make payments on time. If you’re taking out a credit builder loan to try to boost your score, these tips can help to ensure your efforts are successful:
- Monitor your credit report to keep tabs on progress: If you check your credit once a month as you pay off your credit builder loan, you can make sure your positive payment history is being properly recorded. You can also check your credit score regularly to see that it’s climbing. This will help you to stay motivated.
- Pay your credit builder loan on time, every time: It’s imperative that you are never late when you’re paying your credit builder loan as this late payment could cause your score to plummet – especially since you don’t have much of a positive credit history to offset it.
- Pay off your loan in full by the balance due: You’ll also need to make sure you’ve budgeted enough to pay the full amount of the loan by the repayment deadline.
Other Ways to Improve Your Credit
While credit builder loans are one option to try to improve your credit, there are also other things that you should do to help raise your credit score. This includes:
- Applying for a secured credit card: Secured credit cards work differently from credit builder loans. These cards give you a revolving line of credit, so you can borrow up to your credit limit, pay it off, and then charge more. With a secured card, you will usually put money equal to your credit limit in a special security deposit account with the creditor to secure or guarantee the loan. Your record of charges and on-time payments will be reported to the major credit bureaus. And, in some cases, your secured card can eventually turn into an unsecured card with responsible borrowing behavior.
- Becoming an authorized user on someone else’s credit card: If you have someone in your life with good credit, they could help you to boost your score by adding you as an authorized user to one of their cards. This card would then show up on your credit report, even though you didn’t have to qualify for it with your own credit. You’d get the benefit of the positive payment history and the lengthy period of time the card has been open, which should boost your score.
- Avoid borrowing too much: While you need to use credit to build credit, you don’t ever want to max out credit cards as this will adversely affect the credit utilization component of your credit score. A lower credit utilization ratio results in a better score because it shows you aren’t maxing out your cards and are behaving responsibly. You also don’t want to apply for too many new loans or credit cards all at once, as this results in too many inquiries on your credit report — which will also lower your score.
Bottom Line: Credit Builder Loans Can Help Boost Your Score — But Pick the Right One
When you are looking to improve your credit score, credit builder loans are an affordable way to do it. Don’t forget to also consider other options such as applying for a secured credit card so you have a mix of different kinds of credit. Make sure you shop around to find the most affordable credit builder loan when you’ve decided that taking out this type of loan is the right way to improve your score.
1 All Credit Builder Accounts made by Lead Bank, Member FDIC, Equal Housing Lender, Sunrise Banks, N.A. Member FDIC, Equal Housing Lender or Atlantic Capital Bank, N.A. Member FDIC, Equal Housing Lender. Subject to ID Verification. Individual borrowers must be a U.S. Citizen or permanent resident and at least 18 years old. Valid bank account and Social Security Number are required. All loans are subject to ID verification and consumer report review and approval. Results are not guaranteed. Improvement in your credit score is dependent on your specific situation and financial behavior. Failure to make monthly minimum payments by the payment due date each month may result in delinquent payment reporting to credit bureaus which may negatively impact your credit score. This product will not remove negative credit history from your credit report. All loans subject to approval. All Certificates of Deposit (CD) are deposited in Lead Bank, Member FDIC, Sunrise Banks, N.A., Member FDIC or Atlantic Capital Bank, N.A., Member FDIC.
2 Sample products: A loan with a $25 monthly payment, 24 month term with a $9 admin fee at a 15.92% Annual Percentage Rate with a finance charge of $89; A loan with a $35 monthly payment, 24 month term with a $9 admin fee at a 15.97% Annual Percentage Rate with a finance charge of $125; A loan with a $48 monthly payment, 12 month term with a $9 admin fee at a 15.65% Annual Percentage Rate with a finance charge of $46; A loan with a $150 monthly payment, 12 month term with a $9 admin fee at a 15.91% Annual Percentage Rate with a finance charge of $146. Please refer to www.Self.inc/pricing for the most recent pricing options.
Author: Christy Rakoczy