Monday, May 27, 2024

Credit Builder Loans: Can They Help Improve Your Credit Score?

A solid credit history is vital to accomplishing many goals. Whether you want to move into a new home or buy a new car, good credit is necessary. Unfortunately, if you’ve made some mistakes in the past and need to rebuild or improve your credit, that takes time.  However, if you’re struggling to move the needle on your credit, one option to consider is credit builder loans.

Often the biggest hurdle to improving your credit is finding opportunities to prove yourself. If you have negative marks on your credit, lenders may feel hesitant to loan more money to you.

Having little to no credit history is equally problematic as it demonstrates that you have no proven track record of payments.

Credit builder loan companies help you prove to prospective that you’re viable. They let you attack the biggest component your credit score – payment history.

What are Credit Builder Loans?

Credit builder loans are tools that help you as a borrower establish or rebuild credit. When you apply for a loan online, your chosen financial institution deposits money into a secured savings account they hold in your name.

It’s not a large amount; it typically ranges from $500 – $1,000.

You then pay the balance off over a fixed period time via monthly installments. The time frame varies, but is usually around one to two years.

Once it is paid off, you will receive the loan amount as a lump sum, plus any interest earned(if the institution you borrowed from offered interest).

Good credit isn’t necessary to be approved. Therefore, these are a legitimate option for someone trying to build credit, like a teenager on their own for the first time.

They’re also a good option if you are trying to rebuild poor credit due to previously facing bankruptcy or other hardship situations.

How Do They Work?

A bank or online financial institution is often the best choice to get a credit builder loan. The loan may go by the name “Fresh Start Loan” at your local bank. You may also see them marketed as “Starting Over Loans.”

Whatever they’re called, you can ask your bank if they offer credit builder accounts for people with no or bad credit.

When you apply for an account, you complete paperwork as you would with any other loan. You’ll also have to prove that you can pay off the loan in the allotted time.

Every bank is different, but most offer terms between six and 24 months.

Once approved, the money is put into an account that you can’t access until the loan is paid off. That way, the bank is protected if you skip payments.

Upon repayment, you receive the money you paid into it back. Sometimes, you may even get a portion of your interest back as well.

If you followed the process correctly, you’ll walk away with a better credit score.

During the process of having a credit builder loan, every on-time payment is reported to the three major credit bureaus: Equifax, Experian, and TransUnion. This is the true benefit of credit builder loans.

The largest part of your credit score is payment history. It makes up 35 percent of your score, so regular timely payments take you one step closer to your goal.

If you’d rather not take out a loan, but want to have positive payment history impact your score, Experian Boost might be a solution.

Consult our Experian Boost review to learn more.

Best Credit Builder Loan Companies

You have several options to apply for a credit builder loan. Small local banks offer them, as do various online institutions.

The latter are typically cheaper as they don’t have overhead costs. If this sounds like a viable option for you, below are the best options to rebuild your credit.

Credit Strong

Credit Strong is an online institution that is a part of Austin Capital Bank, which has been in business for over a decade.

Since they’re part of a traditional bank, that means they’re FDIC members. As an FDIC member, they have more financial services to offer in addition to unsecured credit builder loans.

Credit Strong also has both 12 and 24 month terms, and a $8.95 administrative fee per account. You can also payoff your account at anytime with no penalty, and they won’t pull your credit to get you started with a loan.

Credit Strong charges an annual percentage rate (APR) of 11 – 15 percent, based on the length of the loan.

Read our Credit Strong review to learn more about how they help you improve your credit.


Self is a financial technology company that helps borrowers build their credit through non-traditional lending methods (mainly credit builder loans). They offer one and two-year terms, with their lowest payments set around $25 a month.

Based on the loan option that you choose, you’ll have to pay an administrative fee of $9 or $15. According to Self, APRs don’t exceed 16 percent. Similar to Credit Strong, you can repay your loan early with Self.

While more well-known in the space, Self tends to be more expensive than Credit Strong. Read our Self review to learn more about the service.

Credit Union or Bank

If neither of the above online options appeal to you, you can also go visit your local bank or credit union to see if they offer credit builder loans. While more banks seem to carry credit builder loans, you may get lucky if you’re with a well-known credit union.

It never hurts to ask. Since each individual bank may call these products a different name, it’s safest to ask about loans that don’t require credit checks and that can help you build your credit over time.

This way, it prevents confusion between you and the bank, and you get your questions answered.

Pros and Cons

Credit builder loans can be a terrific way to improve your credit. This is especially so for anyone on their own for the first time or trying to get their credit ready to buy a house or car.

However, they’re not for everyone. Here’s what to keep in mind with the financial instrument.


  • Built in savings account. Because the money you pay is just going towards a loan in a savings account, you’re paying yourself or building an emergency fund.
  • Easy to get. For most banks, as long as you have income, you can get a loan.
  • You get the money back. Unlike other loans or credit cards, when you’ve paid off a credit builder loan, you get the money back, and sometimes with interest.
  • You build your credit. Of course, the biggest pro is you build your credit as you make payments.


  • All payments are reported. If you’re late on a payment or miss one, it will be reported. So be careful when getting a loan of any type, including a credit builder loan. On the other hand, if you make all your payments on time, this reporting is a mark in the pro column.
  • It may not be free. Some banks and institutions charge you to apply for a credit builder loan. These are typically non-refundable administrative costs.

Each situation is different, so do the math to ensure a credit builder loan is best for you.

Other Options to Improve Your Credit Score

If credit builder loans don’t work out for you, there are some other options to improve your credit score.

Apply for a secured credit card. Don’t think of these as traditional credit cards. While they do work similarly, secured credit cards are opened using your own money.

With a secured card, you deposit $500 to $2000 of your own money onto a card. That money becomes your credit limit.

Over time, if you’re using the card responsibly, your credit score will start to rise. And, since it’s your money, you get it back if you decide to close the card.

You might be able to apply it towards a traditional credit card balance, if that’s an option.

Secured credit cards tend to charge heavier fees and interest rates, but each have their place. They may also tempt you to overspend.

Here is a list of secured credit cards to consider if this sounds like something you need.

Become an authorized user. Have family or friends that are willing to make you an authorized user on their accounts? If so, this may be an option for you.

As an authorized user, you don’t make payments on the card, but it is added to your credit report under payment history.

Remember, only ask to become an authorized user if you trust the person whose credit card you’re asking to use.

You want to make sure they make regular and timely payments, and you should also check with the issuing bank or credit union to see if they report authorized users to the credit bureaus.

Apply for a secured personal loan. A secured loan is harder to receive with a low or no low credit score, but it can be done. This loan is backed by collateral. That means you’re typically putting up something in order to get money.

This could be anything from your car note to your savings. However, secured personal loans also tend to offer more, typically starting out at $1,000.

Regardless of what you do, take on new credit with care. Going overboard is a great way to cause your credit score go down and further hindering your efforts.


If you want to improve your credit score, credit builder loans are worth considering. They are relatively safe and easy to obtain, especially if you’ve never had credit before.

Because they don’t pull a hard inquiry on your credit report, it doesn’t hurt to see if you qualify.

What have you done to build or improve your credit?

Kim Suazo has been a freelance writer and business owner for over four years. When she’s not writing for Frugal Rules, you can find her on other publications like Chime, Discovery, and Due. She also owns her own websites The Entrepremomer and Part-Time Profit, where she teaches overworked moms how to streamline their new businesses so they can scale without a team.

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