What is a credit-builder loan?

Whether you’re building first-time credit or rebuilding your credit, you could consider a credit-builder loan. A credit-builder loan is different from a traditional loan. With a credit-builder loan, you make fixed payments to a lender and then get access to the loan amount at the end of the loan term—instead of borrowing upfront and paying it back over time.

Learn more about how credit-builder loans work and how they could help you build credit.

Key takeaways

• A credit-builder loan gives you an opportunity to show that you can make consistent, on-time payments. 
• Because payment history is an important factor in calculating credit scores, credit-builder loans can be used to build credit.
• Credit-builder loans may be offered by banks, credit unions, online lenders and financial technology companies.
• Good credit scores aren’t required to open a credit-builder loan. But there are sometimes upfront fees required.

If your credit-builder loan application is approved, you can expect the following:

• Your lender sets aside the money: Your lender will set up a savings account or a certificate of deposit (CD) with the loan amount—usually $300 to $1,000, according to the Consumer Financial Protection Bureau (CFPB). Depending on the account and the lender, the loan might earn interest.
• You make monthly payments: You’ll make payments toward the loan—with interest—in installments, usually over the course of six to 24 months.
• Your lender reports your payments to the credit bureaus: Your lender should report the details of your payments—including whether they’re on time—to at least one of the three major credit bureaus every month.
• You get access to the money: If you’ve made all your payments on time by the end of the loan’s term, your lender will make the funds available to you.

When you’re building credit from scratch or rebuilding your credit, a credit-builder loan gives you an opportunity to show that you can handle making consistent, on-time payments. And that can help you build credit because payment history is an important part of what makes up your credit scores.

But keep in mind that credit-builder loans won’t help you build credit if you miss payments or pay late. If you make a late payment or miss a payment altogether, your lender will likely report it to the credit bureaus. And that could hurt your credit scores.

You may be able to find credit-builder loans at community banks and local credit unions. There are also online lenders and financial technology companies that specialize in helping people build and rebuild their credit.

Not necessarily. The eligibility requirements for a credit-builder loan might vary by lender, but you don’t need to have a good credit score to qualify. And some credit-builder loans don’t require credit checks.

Some lenders may look at your banking history through a consumer reporting agency—like ChexSystems. And when you apply, you’ll likely be asked to provide things like employment information and proof of income. You may be asked for other information too, such as loan balances and checking and savings account balances.

It’s also worth keeping in mind that you may have to pay an upfront fee when opening your credit-builder loan account.

Deciding whether a credit-builder loan is a good idea for you depends on your financial situation. As the CFPB explains, credit-builder loans may be “especially beneficial” to those “without a credit score or those with no existing debt.”

The CFPB goes on to say that “consumers who do have debt may want to consider paying down other loans before opening a [credit-builder loan] or choosing other products and services to help them build credit.”

A credit-builder loan is just one option for building credit. Whether you have poor credit or no credit history, here are some other ways you might be able to help build or rebuild your credit:

With a secured credit card, you get access to a line of credit upfront that you can use to make purchases—just like you do with an unsecured credit card. But unlike an unsecured card, a secured card requires you to pay a security deposit in order to open the account. 

But the security deposit is often refundable. And many secured cards don’t come with any annual fees. 

The Platinum Secured card from Capital One has no annual fee and can be opened with a security deposit of $49, $99 or $200. View important rates and disclosures. And you can earn back your deposit as a statement credit if you use your credit card responsibly. Otherwise, it’ll be refunded when you close your account and pay your balance in full.

Some credit card companies, including Capital One, report secured credit card use to the credit bureaus. So if you’re using your card responsibly and making at least your minimum payment on time, using a secured card could help you improve your credit.

But keep in mind that late or missed payments could hurt your credit. And so could going over your credit limit.

Depending on the lender, you may be able to qualify for a personal loan even if you have poor credit or no credit. But a personal loan isn’t the same as a credit-builder loan. It’s usually a more traditional loan, meaning you get access to your funds upfront and pay back what you owe over the life of the loan.

In some cases, a personal loan may be able to help you build credit. But keep in mind that if you’re building or rebuilding your credit, your options may be more limited. For example, you may only qualify for a secured loan, which requires collateral upfront. So if you default on your loan payments, you could lose your collateral to the lender. 

And some personal loans, like payday loans, come with their own unique risks and are unlikely to help you build credit.

Becoming an authorized user on the credit card account of someone you trust could help you practice responsible credit habits, such as making payments on time, reviewing card activity and more. And if the credit card issuer reports authorized user activity to any credit bureaus, it could also help you build credit history.

As an authorized user, you can make purchases on the card, but the primary cardholder is the one who’s ultimately responsible for payments to the card issuer. Their responsible use could help you build your credit and improve your credit scores. There’s generally no credit check or need to apply in order to become an authorized user. 

Just be sure to check with the card issuer to see how it handles reporting authorized user activity to the credit bureaus. This is important because you won’t be able to build credit as an authorized user if the issuer doesn’t report authorized user activity back to any credit bureaus.

Some issuers, like Capital One, may also provide features like online account access to eligible authorized users.

A credit-builder loan can be a great tool for helping you build or rebuild your credit. But there are other credit-building options out there too. No matter which ones you consider, be sure to do your research so you can make an informed decision on the best credit-building choice for you.

If a credit card geared toward improving your credit seems like a good option for your needs, check out Capital One’s cards for building credit and consider getting pre-approved.