Updated April 9, 2022

7 Best Credit Builder Loans to Improve Your Score

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Looking to boost your credit score and build thousands of dollars in savings — all with no credit check? Review this list of the 7 best credit builder loans.

Having a high credit score comes with major perks. You get lower APR on loans, cash back credit cards, and more.

But what if your credit score is bad — or doesn't exist?

Enter: the credit builder loan.

The best credit builder loans allow people with poor credit to improve their score at minimal cost. In this article, review how a credit builder loan works, the pros and cons, and your 7 best options for loans.

Plus, learn what to look for in finding the right loan for you.

What is a Credit Builder Loan?

A credit builder loan is a financial product used to help individuals with low-to-no credit boost their credit score.

Unlike a traditional loan — where the borrower gets money upfront and pays it back over time — a credit builder loan requires monthly payments before distributing the money.

The lender puts your money in a secure account, like a savings account or certificate of deposit. You receive that money after the loan is paid in full.

How Does a Credit Builder Loan Work?

The bank or credit union that lends the money will report your on-time payments to the major credit bureaus (Experian, Equifax, and TransUnion).

This is a big step toward improving your credit score, because payment history is the biggest factor in calculating your score, accounting for 35% of the total score[1].

Where can I get a credit builder loan? Credit builder loans are not common. Your best bet is to check with your local credit unions and community banks, but there are also companies specifically dedicated to credit builder loans (more details below).

Best Credit Builder Loans

Credit builder loans are not offered by all banks, and many of the largest financial institutions like Bank of America, Wells Fargo, and Chase do not offer them.

However, credit builder loans are commonly offered by local credit unions or community banks, plus companies that specialize in credit building.

Here are some of the most popular credit builder loans available.

NOTE: All loan details not publicly available online have been provided by individual representatives at the respective banks, credit unions, and companies via telephone inquiry.

1. DCU

  • Amount: $500 to $3,000
  • Terms: 12, 18, or 24 months
  • APR: 5.00%[2]
  • Type: Secured
  • Credit Check? No
  • Fees: None

Based in Massachusetts, Digital Federal Credit Union (DCU) stands out for their low rates, no credit check, no fees, and customizable terms.

While their membership eligibility requirements make joining more difficult, there's an easy workaround.

You can get a community sponsor or donate to one of the charities associated with DCU, such as Reach Out for Schools for $10.

What is a secured loan?
"Secured" means that the bank is protected, not you. A secured loan is one that requires you to pledge a valuable asset as collateral against the loan (like your home, car, or bank account) that will then become the bank's property if you default on the loan.

2. MoneyLion

  • Amount: $500 to $1,000
  • Terms: 12 months
  • APR: 5.99% to 29.99%[3]
  • Type: Secured
  • Credit Check? Yes — Soft Inquiry
  • Fees: $19.99 monthly membership[4]

MoneyLion is a fintech company that specializes in banking products targeted to underserved populations.

You can get a MoneyLion credit builder loan without the credit check by joining their Credit Builder Plus Membership.

Watch out for the steep price tag though, as you will be paying a $19.99 membership fee on top of your monthly installments with this option. However, it does come with extra perks.

3. Self

  • Amount: $600 to $1,800
  • Terms: 12 or 24 months
  • APR: 15.65% to 15.97%[5]
  • Type: Secured
  • Credit Check? Yes — Soft Inquiry
  • Fees: $9 administrative fee + variable finance charge (up to $146)

Self, another fintech company that helps people build credit, offers pre-packaged loan terms.

Payments range from $25 per month for 24 months to $150 per month for 12 months. Your money is placed into a 12- or 24-month CD where it earns interest.

4. Credit Strong

  • Amount: $1,000 to $10,000
  • Terms: 12 to 120 months (10 years)
  • APR: 5.907%[6] to 15.51%[7]
  • Type: Secured
  • Credit Check? No
  • Fees: Variable admin fee between $15 and $25 (depending on plan)

Credit Strong can help you make large jumps in your credit score using larger loans — but beware the risk. Larger payments and extended loan terms may be hard to keep up with.

However, Credit Strong also has smaller loan options that are more in line with what the other lenders on our list are offering.

5. Metro Credit Union (Available in New England)

  • Amount: $500 to $3,000
  • Terms: 12 or 24 months
  • APR: 4.10%[8]
  • Type: Secured
  • Credit Check? Yes — Hard Inquiry
  • Fees: None

Individuals in the Greater Boston and surrounding areas can access a slightly lower APR than DCU by using Metro Credit Union with no associated fees.

The only catch is that Metro CU performs a hard inquiry, so you'll face a temporary reduction in your credit score for 1-2 years.

Metro CU also offers a wide array of other personal loan programs, including Hardship Loans, Citizenship Loans, and Mass Save® Residential HEAT Loans to help pay for home renovations like energy-efficient heating and insulation to save money on utility bills.

6. SEFCU (Available in Upstate New York)

  • Amount: $500 to $3,000
  • Terms: 5 year max term (no minimum)
  • APR: 0.75%[9]
  • Type: Secured
  • Credit Check? Yes — Hard Inquiry
  • Fees: None

Headquartered in New York's state capitol, SEFCU has easily the lowest interest rate of any credit builder loan we can find, at only 0.75%.

The only catch is that you must live in the area and become a member (for a $1 fee).

There is a maximum term of 5 years, but no minimum loan term. The only stipulation is that your monthly payment cannot be under $35, according to a loan specialist at the credit union.

Even if you don't qualify for SEFCU membership, SEFCU shows how it can pay off to seek out your local credit union for the best rates (even if it may be less convenient to apply).

7. Republic Bank & Trust Company (Available in FL, KY, TN, IN, OH)

  • Amount: $500 to $1,500
  • Terms: 12, 18, 24 months
  • APR: 5.373% to 8.055%[10]
  • Type: Unsecured
  • Credit Check? Yes — Hard Inquiry
  • Fees: $10 processing fee

Republic Bank offers a great variety of terms to satisfy the needs of almost everyone.

There are monthly payment options as low as $21.89 per month, while the average APR for their nine different offerings range between only 5% and 6%.

There is a one-time $10 processing fee, but no other additional costs besides your monthly payment against the loan.

Is a Credit Builder Loan a Hard Inquiry?

It depends on the loan provider. Many lenders offer a credit builder loan with no credit check, while others only do a "soft pull" (which doesn't affect your credit score).

But yes, some providers will perform a hard inquiry when you apply for your loan. Be sure to ask your lender upfront about their credit check process before you apply for a loan.

Important Note: If you're building credit to improve your long-term financial possibilities, try not to focus too much on the effect of a single hard inquiry. The long-term benefits of a healthy payment history will eventually outweigh the ding of a hard inquiry.

How to Get a Credit Builder Loan

Learn how to get a credit builder loan using these five steps.

  1. Check your existing credit score
    If your score is below 600, you may need to pursue an option that does not check your credit score. Checking your score will also give you a starting point to gauge your progress.

  2. Gather your documents
    Next, get all your paperwork in order. This will include:
    • Proof of income (pay stubs or tax returns)
    • Proof of identity (Social Security number and government-issued photo identification)
    • A valid bank account number and routing number
    • Contact information (mailing address, email address, and phone number)

  3. Choose your lender
    Review the options above and shop around at your local credit unions and community banks. This will help you find the lowest rates and fees, as well as terms that work for your budget and timeline.

  4. Review the fine print
    Read the terms and conditions or speak with a banker to make sure you understand any fees you may have to pay, terms regarding late payments or prepayments, and grace periods. Do not get stuck with a bill you can't afford.

  5. Apply for your credit builder loan
    If you're applying at a credit union or community bank, you'll probably have to apply in-person at a local branch. If you're applying at a larger bank or company like Self, you can likely apply online.

The Pros and Cons of Credit Builder Loans

Let's examine the risks and benefits associated with credit builder loans.

Pros

  • Helps build credit by establishing a solid track record of on-time payments
  • Creates healthy savings habits to teach you how to set aside money each month
  • Starts your emergency fund in the form of a savings account or CD at the end of the loan term

Cons

  • High interest rates — many credit builder loans charge rates on par with high-interest credit cards
  • May harm your credit if you make late payments on the loan
  • Not effective for individuals with existing debt (details below)

According to Experian, you'll need to have an open and active account If you're just starting out and it takes about three to six months to generate your first credit score.[11]

What to Look for in a Credit Builder Loan

If you think a credit builder loan is right for you, consider these factors while performing your search.

Low Cost
The first criteria you want to consider, of course, is the cost. This comes in two forms: interest rates and fees. While interest rates may seem abstract, the total cost over the life of the loan can add up to hundreds of dollars.

For example, if you take out a $3,000 loan with a 24-month term at 15% APR, you will pay $491.04 in interest alone. That money now belongs to the bank, not you. If you borrow the same loan with a 5% APR, you end up paying only $158.74 in interest — a savings of $332.30.

Appropriate Loan Amount & Term
The last thing you want to do is to take out a credit builder loan that makes it difficult to meet your monthly financial obligations.

Figure out what you can save each month and select a loan amount with monthly installments you can afford. Calculate this based on your current income — don't plan to make more money in the future to cover the cost of the loan.

Remember, failing to make credit builder loan payments on time will reduce your credit score even further.

Convenient Location
You will receive your funds in the form of a savings account at the end of the loan term, so you want to select a financial institution that you can easily access. This may be a local credit union or a digital bank with an ATM network in your area.

According to a 2020 study on credit builder loans by the Consumer Finance Protection Bureau, these loans are only effective for individuals with no existing debt.

The study showed that participants without existing debt experienced score increases 60 points higher than participants with existing debt (who saw an average 3-point reduction in their credit score).

Bear in mind that 39% of participants had at least one late payment reported, which likely explains the credit score reduction for the participants with existing debt.

The Bottom Line

Credit builder loans are not for everyone. If you have existing debt or would struggle to make monthly payments, this product may not be for you. However, if you have no existing debt and can afford the monthly payment, a credit builder loan can help you elevate your credit score.

A better credit score can grant you access to better financing options, cheaper loans, more rewarding credit cards, and opens the door to homeownership — the gateway to true wealth.

For more information, check out how to build your credit score for the first time.

References

  1. ^ "What does into my FICO®scores?": FICO® Score, 2021.
  2. ^ DCU. Credit Builder Loans, Retrieved 3/16/2022
  3. ^ MoneyLion. What is the APR on a Credit Builder Plus loan?, Retrieved 3/16/2022
  4. ^ MoneyLion. How much are Credit Builder Plus membership fees and when will I be charged?, Retrieved 3/16/2022
  5. ^ Self. Pricing, Retrieved 3/16/2022
  6. ^ Credit Strong. Magnum Accounts, Retrieved 3/16/2022
  7. ^ Credit Strong. Build & Save Accounts, Retrieved 3/16/2022
  8. ^ Metro Credit Union. Personal Loans & Home Equity Rates, Retrieved 3/16/2022
  9. ^ SEFCU. Fresh Start share-secured loan, Retrieved 3/16/2022
  10. ^ Republic Bank. Credit Builder Terms, Retrieved 3/16/2022
  11. ^ Experian. A Beginner's Guide to Building Credit, Retrieved 4/9/2022

Write to Justin Barnard at feedback@creditdonkey.com. Follow us on Twitter and Facebook for our latest posts.

Note: This website is made possible through financial relationships with some of the products and services mentioned on this site. We may receive compensation if you shop through links in our content. You do not have to use our links, but you help support CreditDonkey if you do.

All Credit Builder Accounts made by Lead Bank, Member FDIC, Equal Housing Lender, Sunrise Banks, N.A. Member FDIC, Equal Housing Lender or Atlantic Capital Bank, N.A. Member FDIC, Equal Housing Lender. Subject to ID Verification. Individual borrowers must be a U.S. Citizen or permanent resident and at least 18 years old. Valid bank account and Social Security Number are required. All loans are subject to ID verification and consumer report review and approval. Results are not guaranteed. Improvement in your credit score is dependent on your specific situation and financial behavior. Failure to make monthly minimum payments by the payment due date each month may result in delinquent payment reporting to credit bureaus which may negatively impact your credit score. This product will not remove negative credit history from your credit report. All loans subject to approval. All Certificates of Deposit (CD) are deposited in Lead Banks, Member FDIC, Sunrise Banks, N.A., Member FDIC or Atlantic Capital Bank, N.A., Member FDIC. The Self Visa® Credit Card is issued by Lead Bank, Member FDIC, Equal Housing Lender.

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Self

Apply for a Credit Builder Account at Self

  • Get the savings plan that helps build credit today! No checking account or security deposit required.
  • Choose the amount you want to save and make monthly payments towards your savings goal
  • Monthly payments are reported to the three major credit bureaus.
  • For Example: A $545.00 Credit builder account, paid 12 times over one year would have a monthly payment of $48.00, and an Annual Percentage Rate of 10.69%
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