There are several ways credit scores can affect our lives. These include interest rates, credit limits, and loan or credit card approvals.
Having poor or no credit can make it difficult to get approved for any credit you may want. However, credit builder loans provide a way to build credit with no credit history and less risk. These types of loans require you to pay them off before you can use them and are paid over a set period.
There are numerous banks, credit unions, and online lenders to choose from. In this article, we will share some of the best credit builder loans available in 2022.
The first credit builder loan we will review is Self. Founder and CEO, James Garvey, stated, “to get credit, you need to have credit. It’s a catch-22, and the system is set up against you.” He founded Self as a way to address this problem.
Self offers four different credit builder plans:
|Cost Per Month||$25/month||$35/month||$48/month||$150/month|
|Term||24 months||24 months||12 months||12 months|
|Admin Fee (Single Fee)||$9||$9||$9||$9|
|Annual Percentage Rate||15.92%||15.97%||15.65%||15.91%|
- No hard credit pull on your credit report
- Automated payments
- Track your credit score
- Reports to all three major credit bureaus
- Anytime cancelation
- Optional secured credit card
Self credit builder loans are a suitable option for people with lower credit scores and no outstanding debt. Repayment plans start at $25 per month, and you can safely apply for a Self credit builder loan without taking a hard credit inquiry.
Conveniently, Self also offers an easy cancelation option. This means you can cancel your loan at any time and your money will be returned to you, minus interest and fees.
MoneyLion is another credit builder loan and was founded in 2013 to empower Americans rather than capitalize on their hardship. Their loan product, Credit Builder Plus, gives you access to a portion of your loan amount before you pay it back. The full amount will be available after payment completion.
Credit builder loans take place over twelve months and can go as high as $1000. Be aware that there is a monthly membership fee ($19.99) and some administrative fees.
- Early access to a portion of your loan funds
- Ability to monitor your credit score and progress
- Reports to all three major credit bureaus
- Options for rewards
MoneyLion could be a viable option if you need to build your credit but also need to access some of your loan sooner. And you also don’t need to worry about a hard credit check.
MoneyLion’s credit monitoring tool provides useful insights that can help you get comfortable keeping tabs on your credit score.
3. Digital Federal Credit Union
Digital Federal Credit Union is a not-for-profit financial cooperative owned and operated by its members. DCU offers consumer and business banking as well as insurance for auto, home, and liability.
Their credit builder loans range from $500 to $3000, and terms last from 12 to 24 months. Digital Federal Credit Union has a fixed annual rate of 5.00%, and their estimated monthly payment (per $1,000) is $43.87. However, both are subject to change if the credit union sees fit.
- Establish credit as you repay on time
- Personal loan calculator
- Ability to earn dividends from your DCU savings account
Because DCU is a member-owned credit union, you’ll have to qualify for membership before making use of their services. You can qualify through your employer if they are associated with DCU, or by having a family member who is a member.
4. Credit Strong
Credit Strong is a branch of Austin Capital Bank and a preeminent community bank. Their credit builder loan is a simple four-step process. First, you must open an Instal account with them. Then, select your plan type, “Build” for credit building or “Build & Save” to save and build credit.
Next, make your monthly payments on time. And finally, unlock your savings account when you close your account or finish paying off your loan.
Credit Strong offers several options for people looking to improve their credit score through credit builder loans.
One option is Revolv, which requires a $99/year subscription fee. With Revolv, you can instantly build $500 of revolving credit, improve your credit mix, build payment history, optimize your utilization, and build savings. Additionally, you can get a free monthly FICO Score report.
Another option is Instal, which offers three different payment plans. For $28/month, you can save up to $1,010 in just 48 months and have a $1,010 installment account reported on your credit history. For $38/month, you can save up to $1,100 in just 36 months and have a $1,100 installment account reported on your credit history.
And for $48/month, you can save up to $1,000 in just 24 months and have a $1,000 installment account reported on your credit history.
A third option is CS Max, which offers several payment plans with different installment account sizes. For $49/month, you can have a $2,500 installment account reported on your credit history, demonstrate repayment on larger credit obligations, supercharge your personal credit for business purposes, and build up to 60 months of payment history.
With just $99/month, you can have a $5,000 installment account reported on your credit history and get the same benefits. For $199/month, you can have a $10,000 installment account reported. And for $449/month, you can have a $25,000 installment account with the same benefits. In all cases, you can cancel at any time with no penalty.
SeedFi was founded in 2019 as an alternative to traditional bank loans. Their Credit Builder Prime product works in $500 increments. You set an amount you would like to pay from each paycheck, and SeedFi adds that amount to your credit builder loan. When you reach $500, you can access that money.
SeedFi’s monthly fee is only $1, and the minimum payment ranges from $10-$40. You can expect an APR of 4.03% to 5.26%, and the term ranges from 7 to 27 months.
- Automated payments
- Monthly reports to all three major credit bureaus
- Interest-free loan
- No initial credit check
SeedFi’s Credit Builder Prime allows you to take on a rolling credit builder loan. Once your first loan is paid off, the money is transferred to a second account, and the loan begins again.
This allows you to continuously build your credit up with a safe and easily manageable loan. This is great if you’re worried about maintaining your credit once the loan ends.
What is a credit builder loan?
A credit builder loan is a type of loan designed specifically to help you build credit. Taking out a traditional loan is about needing to borrow money, but a credit builder loan is more about building credit.
With a credit builder loan, you make regular deposits into a locked savings account for a specified period of time. As you make your monthly payments on the loan, the lender will report your payments to the three major credit bureaus. These regular reports are key to building your credit up.
When you’ve completed the repayment terms, the money you’ve saved up will be “unlocked”. So with a credit builder loan, you’ll receive the loan amount only after it’s been paid for. In some cases, the loan funds might be released throughout the loan term rather than at the very end.
Credit builder loans typically range from $300 to $5,000 with repayment terms available from six to twenty-four months.
Who should use credit builder loans?
Credit builder loans are best suited for people with thin or bad credit, or those looking to rebuild damaged credit. The greatest benefits will typically come to those with a credit score below 620.
The great thing about credit builder loans is that they can also help establish good credit practices. This is important because once you have built up your credit, you need to know how to maintain and improve it. Things like making monthly payments and maintaining a low credit utilization ratio are essential habits to develop.
Those with good or excellent credit scores will naturally benefit the least from this kind of loan. If that’s you, you might instead consider a low-fee credit card to make periodic purchases with. This can help to keep your credit healthy.
Will a credit builder loan raise my credit score?
The degree to which your credit score will improve with a credit builder loan depends on a variety of factors. The most significant difference people see here depends on whether they are already in debt. And if so, how much damage your credit score has taken. This 2020 study from the CFPB demonstrates that those without debt will most benefit from taking out a credit builder loan.
If you’ve got a thin or non-existent credit history, making regular payments towards a loan can improve your credit standing within a few months. You’ll also see a quick improvement in your credit score.
Carrying debt means that it will take much longer for your credit report to improve as things level out.
Pros of Credit Builder Loans
Establish Good Credit
The biggest benefit of credit builder loans is of course the opportunity to establish a good credit standing. And in theory, it should be relatively simple for you to increase your credit score as long as you can continue making payments.
In contrast, if you have poor credit, a credit builder loan can provide you with financial stability.
Low Risk Loan
The reason credit builder loans work so well is due to the removal of the usual risks that come with traditional loans. Because you’re not getting the loan amount until it’s been paid for already, this negates the temptation of seeking a loan you can’t really afford.
The best credit builder loans tend to come with lower fees, and even interest rates, compared to credit cards or traditional loans. This is partly due to the lack of risk for the lender.
For those who don’t have the means to afford a regular personal loan, a credit builder loan can present a more affordable alternative.
Cons of Credit Builder Loans
Risk of Further Credit Damage
Sometimes credit builder loans can sound too easy. While these products are designed to build credit with relative security, failing to make timely payments is still a real possibility.
If you’re using this kind of loan to repair damaged credit, missing the payments could be particularly detrimental to your finances.
Paying Interest in Advance
Most credit builder loans come with rates under 10%. But some can be higher, and if you’ve got poor credit history you may have to settle for a higher rate.
In any case, it can be frustrating to pay interest on money you can’t access for perhaps a year or two. This might feel wasteful, and if you eventually fail to fulfill the loan term, you can end up losing money.
How to Compare Credit Builder Loans
When borrowing money, the APR will always be a major factor in your decision. This is a figure which represents the total cost of the loan, including both the interest rate and any necessary fees.
The loan amount will be a major factor in your decision. Most credit builder loans are no more than $1,000. But if you’re looking to build a bigger windfall of cash while you improve your credit, there are options out there for bigger loans.
A lot of folk will use a credit builder loan to help build savings, too. For that purpose, a higher loan amount might be sought.
The loan term refers to the length of time you’ve got to make payments for. Loan terms for credit builder loans are typically short, with most between twelve and twenty-four months.
The reasoning here is that after two years, you should have a good enough credit score to continue building credit without the help of a loan.
Credit Bureau Reporting
Credit builder loans work to increase your score by reporting monthly payments. But don’t take it for granted that a lender is reporting payments. Make sure that any lender offering a credit builder loans is committed to reporting your monthly payments to all three credit bureaus.
Whether borrowing from banks or credit unions, always check for regular credit bureau reporting. This is what helps you to build a positive payment history.
Depending on your financial needs, the availability of secondary services may be of interest to you. Some lenders offering credit builder loans will also have things like credit monitoring, educational finance tips, or a secured credit card.
Keep in Mind
There are a few things to remember when searching for a credit builder loan.
You will want to pay attention to the annual percentage rate (APR). The APR is the total daily periodic rate multiplied by the number of times the interest is compounded in a year. It includes interest and any fees charged to the account. In some cases, you may find that other types of loans, like personal loans, have better APRs than credit builder loans.
Credit builder loans are designed to help you build a positive credit history. However, they can be detrimental to your credit if you overextend yourself and are unable to make your monthly payments in full and on time. Moreover, on-time payments are not the only component of your credit score. Your credit amount and mix, total debt, credit utilization, credit history length, and more contribute to your credit score.
A credit builder loan is still additional credit, so it may temporarily lower your credit score.
Other Ways to Improve Your Credit
Credit builder loans are a great way to improve your credit, but they aren’t the only option. Let’s run through some alternatives worth considering:
Secured Credit Card
A secured credit card works to build and improve credit by preventing you from overspending. With a secured card, you deposit money equal into a security deposit account with the creditor. This deposit acts as your credit limit, and guarantees the loan.
Just like a credit builder loan, your payments record will be report to the major credit bureaus monthly.
Become an Authorized User on Another Credit Card
If you have a friend or family member who has good credit, they might agree to add you as an authorized user. Their credit card account would be present on your credit report, even though you don’t own the card outright. With this method, you can benefit from the other person’s positive payment history, so it’s a great way to build credit.
Reduce Credit Utilization
Improving your credit score doesn’t always require you to take on more credit. If you’re already using credit, managing your credit utilization can potentially lead to quick improvements.
Doing this involves reducing the amount of credit you use regularly. If your credit limit is $5,000 for example, a good credit utilization ratio means using no more than $1,500 at any time.
Best Credit Builder Loans FAQ
Who can get a credit builder loan?
To qualify for a credit builder loan, you must be at least 18 years old, have a valid bank account, and a Social Security number. You’ll also have to prove that you can afford the monthly minimum payments for your desired loan.
Moreover, take note that depending on the state you’re in, your desired lender may not be able to offer credit builder loans.
What are the credit builder loan fees?
Most of these loan products come with standard fees. On top of one-time admin fees, there are usually monthly fees as well as late payment fees that can vary between lenders.
How much do credit builder loans increase credit score?
Lenders suggest that the average borrower can see a 40 to 60-point credit score increase within six months with credit builder accounts.
Do credit builder loans require a credit check?
No. Credit builder loans don’t require a hard inquiry. Some lenders may perform a soft inquiry to verify your identity, however.
Credit builder loans may initially lower your credit score. However, over time, they will help you build credit history and raise your credit score. There are several options to choose from, so do your research and pick the best credit builder loan for your situation.