Credit Builder Loans: Boosting Your Credit With Debt

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LendingTree is compensated by companies on this site and this compensation may impact how and where offers appears on this site (such as the order). LendingTree does not include all lenders, savings products, or loan options available in the marketplace.

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been reviewed, commissioned or otherwise endorsed by any of our network partners.

Credit builder loans can help you improve your credit if you make consistent, on-time payments. Although a credit builder loan doesn’t guarantee an increase in your credit score, it’s likely to boost it as long as you stick to your repayment timeline.

How credit builder loans work

A credit builder loan is designed specifically to help you build credit. It’s similar to a traditional personal loan, as it requires you to pay interest in installment payments over a set period of time.

However, with a credit builder loan, you typically don’t receive your funds right away. Instead, the lender sets the funds aside into an escrow trương mục or a restricted savings trương mục, like a certificate of deposit (CD).

The money acts as a security deposit for your loan, and your lender typically gives you access to your credit builder trương mục only after your loan has been fully repaid.

With a credit builder loan, there’s no guarantee that your credit score will rise a great amount, but loan payments are generally reported to all three major credit bureaus and on-time payments may help improve it.

These loans are usually available at credit unions, community banks and online lenders. Some lenders even offer credit builder loans with no credit check, so your score won’t be dinged due to a hard credit inquiry.

Key Key things to know about credit builder loans Key

  • The loan amount is held in a separate trương mục. The amount you borrow is typically locked in a savings trương mục or CD that secures your loan.
  • You can choose a short repayment period. It’s likely you’ll have 12 to 24 months to repay your loan, but some lenders may offer shorter repayment terms. That means you might be able to access your funds sooner.
  • They’re often small loans. You don’t need to borrow a lot of money to build credit. Many credit builder loans are typically for $500 to $3,000.
  • The lender reports your trương mục to the credit bureaus. Credit-building programs can help build credit because your lender will likely report loan payments to the three major consumer credit bureaus: Equifax, Experian and TransUnion.
  • They’re not free. Most lenders will charge interest on your loan and may also charge a fee to open your trương mục.
  • You usually receive the funds after repaying the loan. Once you’ve fully paid off your loan, you’ll receive the money that was set aside in a separate trương mục. In some cases, a lender may let you access some of the funds or interest earnings as soon as the trương mục is opened, or as you make payments.

You should expect to pay interest on a credit builder loan. However, the loans are generally less expensive than installment loans for bad credit borrowers.

With some credit-building programs, you’ll be able to earn interest on the money you set aside. If the lender is a credit union, the trương mục may be called a shared savings trương mục and you’ll likely see the earnings referred to as dividends rather than interest. If you default on a credit builder loan, your lender may liquidate the funds in your shared trương mục to pay the balance — plus, your credit score could also take a hit.

Credit builder loans pros and cons

If you’re considering taking out a loan to build credit, you’ll want to consider both the benefits and risks.

How to manage a credit builder loan

A credit builder loan will only help your credit if you keep up with your payments. These steps can help you adhere to the terms of your loan agreement:

  1. Make your payments on time. Set up automatic payments to lessen the chances that you’ll forget, and make sure you have enough in your bank trương mục to avoid overdrafts.
  2. Keep your trương mục open. Unless you have a specific reason for paying off the loan early, consider keeping it open for the entire loan term. This will maximize the number of on-time payments reflected on your credit report.
  3. Communicate with your lender. If you’re having trouble affording your monthly payment, don’t wait until after the due date to reach out to your lender. Your lender may be willing to work with you to help avoid a hit to your credit score.

Where to find credit builder loans

To get a credit builder loan, you’ll want to work with a trustworthy lender. Credit builder loans can typically be found with the following types of financial institutions:

  • Banks
  • Community development financial institutions
  • Credit unions
  • Lending circles
  • Online lenders

The following institutions are just some of the lenders that offer credit builder loans to potential borrowers looking to improve their scores.

Digital Federal Credit Union (DCU)

  • APR: 5.00%
  • Terms: 12 to 24 months
  • Amounts: $500 to $3,000

What to know about DCU: When you make payments to Digital Federal Credit Union (DCU), it reports your loan repayment to the credit bureaus. This can help to steadily increase your credit score over time.

After you’re approved for a loan, the money will be secured in a DCU savings trương mục, which can earn dividends. When your loan is completely paid off, not only will you receive the funds, you’ll also get the dividends.

Unfortunately, DCU does not provide clear eligibility criteria for credit builder loans on its website.

Metro Credit Union

  • APR: 4.10%
  • Terms: Up to 24 months
  • Amounts: $500 to $3,000

What to know about MCU: Metro Credit Union (MCU) assists borrowers whose credit needs improvement. With loans offered up to $3,000, borrowers can work on their credit by taking out a small loan.

Credit builder loans from MCU are kept in a savings trương mục with the credit union until the loan is completely paid off. Unfortunately, MCU does not provide a lot of transparency on its website around qualification requirements.


  • APR: 15.65% to 15.97%
  • Terms: 12 and 24 months
  • Amounts: $600 to $1,800

What to know about Self: With loan amounts only offered up to $1,800, Self offers credit builder loans on the smaller end of the spectrum. In total, Self gives borrowers the option to choose between four different loan sizes.

With each loan, Self charges a $9 administrative fee and a finance charge between $46 and $146, both of which come out of the final amount you’re offered. Self also charges a $0.30 + 2.99% fee if you make payments with a debit card, as well as a small fee for paying off the loan early.

Typical loan interest rates and fees

  • Upfront fees. Many credit builder loan companies charge an upfront, nonrefundable fee, which may be called an application fee, administrative fee or processing fee.
  • Annual percentage rate (APR). Interest rates and fees for credit builder loans vary widely, with APRs ranging from 0% to 15% or more.
  • Annual percentage yield (APY). The APY on a credit builder trương mục determines how much interest you’ll earn. While it’s likely you won’t earn a lot of money on a small loan, a higher APY will lead to lower loan costs overall.
  • Prepayment penalties. You probably won’t be charged a prepayment penalty for paying off your loan early, and any fees you do see will likely be nominal. However, if your funds are in a CD, you may have to pay a penalty for closing the CD.

How to apply for a credit builder loan

If you’re interested in borrowing a credit builder loan, these steps can help:


Decide whether you can take on new debt

Before looking for a credit builder loan, assess whether you’ll be able to keep up with payments. Borrowers who took out credit-building loans were more likely to be late paying back other loans, especially if they already had existing debt, according to a Consumer Financial Protection Bureau (CFPB) study.

If you’re struggling to pay your bills, look for a credit builder loan that comes with both a low loan amount and a low monthly payment. Your payment history can be the most important factor that determines your credit scores, constituting about 35% of your FICO Score. Even a single late payment — defined as being more than 30 days past due — might hurt your credit scores.

Compare credit builder loan companies

Look for a credit builder loan online and at branch-based financial institutions like credit unions. Besides offering credit builder loans, several online lenders also offer credit builder cards, which are credit cards secured by money you first deposit into an trương mục before it becomes active.

Because they’re not-for-profit institutions, credit unions often offer lower interest rates and fees than traditional banks. However, you’ll likely need to be a member before opening an trương mục. In some cases, a credit union may also require you to take a financial education course to qualify for their credit builder loan program.

Review terms and apply
  • How the loan is secured. Most credit builder loans require collateral, which will be the loan proceeds that are kept in a separate trương mục. In addition, some lenders offer an unsecured credit builder loan, but it may come with a higher interest rate.
  • The APR and APY. To find a loan that will cost you the least overall, look for one with the lowest APR and the highest APY. Lenders may refund part of your interest payments — perhaps even half — if you’re never late with payments. Some loans come with both a 0% APR and a 0% APY.
  • The initial fee. The charge for opening an trương mục is often nominal (say, $25). If fees are a concern, look for a lender that either doesn’t charge an upfront fee, or is willing to refund it if you take a personal finance class.
  • Credit reporting policy. Make sure your lender will report both your trương mục and loan payments to the three main credit bureaus.
  • Policies for late and missed payments. You may get a grace period, or you may be charged a penalty if you’re as little as one day late. Once your payment is late 30 days or more, your lender is allowed to report it to credit bureaus, which may cause your score to drop. With some loans, a lender may automatically make a payment using a borrower’s trương mục, or close it before 30 days are up, to avoid reporting the payment as late.
  • Apply either online or in person. The application process varies by lender, but you’ll likely be asked to provide basic information, like your name, address and a form of government I.D. You may also be able to choose the loan amount and repayment terms. Some banks may require you to visit a branch to verify your identity and sign a disclosure agreement.

Alternatives to a credit builder loan

Credit builder loans aren’t the only way to improve your credit score. Here are some other strategies that can help.

ID Theft iconID Theft icon Open a secured credit card

Although you can’t typically open an unsecured credit card with bad or no credit (student credit cards are sometimes an exception), you might be able to open a secured credit card. Secured cards require that you put down a security deposit, usually a minimum of $200.

When using your card, try not to charge more than you can afford to pay off each month. As long as you don’t carry a balance, you won’t have to pay interest fees on your purchases. This approach will also ensure you make on-time payments, which will help build your credit score.

handshaking icon Become an authorized user on someone else’s credit card

Becoming an authorized user on someone else’s credit card may also improve your credit score. You don’t need to use the card at all; you just need to be added to the trương mục.

As long as the primary cardholder makes on-time payments and keeps their credit utilization low, their good credit habits could boost your score.

man with dollarsman with dollars Borrow a personal loan

Some personal loan lenders will lend to borrowers with bad credit, though you should be careful about high, unaffordable interest rates. You might be able to get an affordable secured personal loan, which requires that you put up collateral, such as a savings trương mục or another asset.

Again, you’ll need to make on-time payments to improve your score. If you don’t, you could not only damage your credit score, but also risk losing your collateral.

CreditScore iconCreditScore icon Take other steps to improve your credit

Making on-time payments on a loan or line of credit can help improve your credit score. Some other steps you can take include:

  • Paying down debt balances
  • Keeping your credit utilization low
  • Consolidating debt to simplify repayment and get a lower interest rate

It may also be worth ordering copies of your credit reports from (available from each credit bureau) so you can check them for errors. If you find any mistakes, you can dispute them and try to have them removed. This guide goes into more detail about the steps you can take to improve your credit.


By offering a detailed and objective trương mục of each lender’s rates and terms, LendingTree’s goal is to provide you with all the information you need to make a financially sound decision specific to your situation. We chose these credit builder loans from lenders that service borrowers wanting to improve their scores.

Credit builder loans were chosen based on the following criteria:

  • Transparent rates and repayment terms
  • Flexible loan amounts of at least $500
  • Low fees