How To Get a Credit Builder Loan 

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A credit builder loan is a simple way to build credit from scratch. You pay monthly, and the lender reports your payments to the credit bureaus. 

Here are the steps you’ll take to get a credit builder loan:

1. Check your credit score, even if it’s blank.
2. Compare lenders, such as banks, credit unions or online lenders.
3. Choose a loan amount you can afford.
4. Apply online or in person.
5. Make monthly payments on time.
6. Get the money after completing your monthly payments.

What Is a Credit Builder Loan? 

A credit builder loan is a small loan designed to help you build credit. That’s the main point of the loan — not to borrow funds.

With this type of loan, you get approved for a small amount of money, typically between $300 and $1,000, and the lender will hold that in a secure account.

You’ll pay off the loan each month, and once you’ve paid it off completely, the funds will be yours.

The lender will report your payments to the credit bureaus, which then helps build your credit score.

Who Should Consider a Credit Builder Loan? 

A credit builder loan could make sense if you’re wondering how to get a loan without any credit, though you won’t be able to borrow a large sum of money.

You Have No Credit History

Credit builder loans are a good option for people with no credit or a thin credit history, such as young adults who are just starting out and establishing their own financial footing.

You Are Repairing Credit

Credit builder loans can also make sense for anyone who needs to repair and rebuild their credit score after experiencing financial struggles.

For instance, if you’ we’re unemployed and had a period where you missed several credit card payments, taking out a credit builder loan and making on-time payments can help repair the damage.

You Can On-Time Payments To Improve Credit

Basically, credit builder loans are an option for anyone who wants to prove they can make on-time payments and have those payments positively impact their credit.

Tips for Success With a Credit Builder Loan

To make the most of your credit builder loan, follow these guidelines:

• Set up autopay to avoid missing payments: Otherwise, you risk having a missed payment reported to the credit bureaus and hurting your credit.
• Pick a short loan term, between six to 12 months: Since credit builder loans are for smaller amounts, this should be manageable.
• Keep making payments: Missing payments can damage your score, so make sure you stay on top of them, even if it’s a small loan.
• Don’t open too many accounts at once: Don’t overextend yourself; the purpose of a credit builder loan is to build credit, and you don’t want to take on more debt than you can afford to pay off.
• Monitor your credit score regularly: Don’t expect the increase to happen overnight, but with on-time payments, you should see an uptick in a matter of months.

Where Can I Get a Credit Builder Loan? 

Much like personal loans, you can get credit builder loans through most financial institutions, including where you do your personal banking.

Credit Unions

Consider starting your search with credit unions, as these are often the most affordable options. You can also look at online lenders, which tend to offer fast approval.

Community Banks

Community banks may offer affordable options as well, especially compared to major banks.

Fintechs

Finally, fintech apps like CreditStrong, SeedFi and Self offer credit builder loans.

You should compare options before deciding on a credit builder loan to ensure you get the lowest rate and the terms that work best for you.

How a Credit Builder Loan Helps Build Credit 

A credit builder loan helps build your credit by reporting your on-time payments to the credit bureaus. Payment history accounts for 35% of your credit score, so this alone can have a positive impact on your credit over time.

Credit builder loans also represent a new account type added to your credit mix, which can further boost your score. Credit mix, meaning the different types of credit extended to you, accounts for 10% of your score.

Also, for the maximum positive impact on your credit, the credit builder loan needs to be reported to all three of the major credit reporting agencies — Equifax, Experian and TransUnion — so confirm that your lender reports to all three before signing the loan agreement.

Keep in Mind

Note that your credit score won’t see the improvement overnight. Expect the boost from a credit builder loan to take effect in six to 12 months.

Credit Builder Loan vs. Secured Credit Card 

Credit builder loans are an alternative to secured credit cards, which can also be used to build credit. With a secured credit card, you make a cash deposit when you open the account, and that deposit generally equals your credit limit.

While credit builder loans and secured credit cards are both tools for building credit, they differ in several ways.

Can You Get a Credit Builder Loan Without Credit? 

You can get a credit builder without credit. In fact, these loans are designed for people with no credit or a thin credit profile looking to build their credit. You usually won’t need a cosigner or a high income, either.

Approval requirements for this type of loan aren’t as stringent as those for other personal loans. Lenders may look at other parts of your credit profile, like your bank history, in lieu of your credit score when reviewing your application.

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