Best Credit-Builder Loans and How They Work

Checking rates won’t affect your credit score

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Written by
Lauren Nicholson
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Written by
Carol Pope
Updated July 30, 2024
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  • You can use credit-builder loans to beef up your credit history if you have no credit (or thin credit).
  • You’ll likely pay interest and fees to take out a credit-builder loan, though some lenders refund the interest in part or in full once you’ve paid off the loan.
  • Credit-builder loans are only worth it if you can easily afford the monthly payments and don’t already have loans or other debt.
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How do credit-builder loans work?

When you take out a credit-builder loan, the lender will release your funds only after you make payments. This is the reverse of traditional personal loans, which disburse your money up front in a lump sum.

Since credit-builder loan lenders report your payments to the major credit bureaus, these loans help you establish a payment history (which makes up 35% of your credit score). If you make your payments on time, you may generate (or improve) your credit score.

Here’s how credit-builder loans compare to typical loans:

Credit-builder loanPersonal loan
PurposeTo build credit from scratchCan use loan money for many purposes, including debt consolidation and large purchases
Loan moneyTransferred to locked savings accountTransferred directly to you via direct deposit or check
Funding timelineMoney only available after you make monthly payments; some lenders release a bit of the loan at a time, while others give it to you in a lump sum when you’ve paid off your loanLump sum paid to you up front
Cost of loanInterest and fees, though some lenders refund interest partially or in full when you pay off your loanNon-refundable interest and fees, including origination fees, early payment penalties and late payment fees
Loan amounts and termsAmounts usually range from $300 to $1,000, and repayment terms span from six to 24 months, though they can be longerAmounts usually range from $600 to $200,000, and repayment terms typically range from 24 to 60 months
ApprovalEasier to qualify for because the lender will keep your funds if you don’t pay back your loanPersonal loan requirements and credit checks make typical personal loans harder to qualify for than credit-builder loans

Best credit-builder loans

Intuit Credit Karma: Best overall credit-builder loan

Doesn’t charge interest

No specific terms

Starting at $500

None

Pros
  • Free – no fees or interest charges
  • No credit check
  • Doesn’t require monthly payments
  • Reports to all three credit bureaus
Cons
  • Savings account doesn’t earn interest
  • If you don’t make monthly payments, you won’t see the same credit boost

What to know

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The best credit-building loan is the Credit Karma Credit Builder because it’s free and gives borrowers the flexibility to save as much and as frequently as they want. Credit Builder doesn’t require monthly payments, and you can start with payments as small as $10. Once you’ve saved $500, Credit Karma will release your money to you.

It may be tempting to skip monthly payments without facing a penalty, but you’ll build your credit much faster if you choose to make regular payments.

How to qualify

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To get a Credit Builder loan with Credit Karma, you’ll need:

  • Credit score: 619 or lower
  • To open a Credit Karma Money Spend account
  • Connected paycheck, connected external bank account or a single direct deposit of $750 or more

BMO: Best credit-builder loan from a bank

10.80% - 19.12%

24 to 60 months

Starting at $1,000

$75 loan processing fee

Pros
  • Loan money earns interest
  • Can qualify even with no or low credit
  • Low, one-time fee
  • Autopay discount
Cons
  • Loans start at $1,000
  • High starting APR

What to know

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If you’re a current BMO customer who can take advantage of the autopay interest rate discount from a BMO checking account, the BMO credit-builder loan is worth considering. When you take out a credit-builder loan with BMO, your money will go into a certificate of deposit (CD), where it will earn interest.

BMO credit-builder loans come with high annual percentage rates (APRs), meaning that you’ll have to pay more to take out the loan. While your loan will earn interest in a CD account, it likely won’t be enough to offset the cost of the interest payments you make.

How to qualify

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BMO doesn’t have a minimum credit score requirement for the credit-builder loan. To evaluate your eligibility, it will review how you pay off any current debts and assess whether you can afford the monthly payment for your credit-builder loan.

DCU: Best credit-builder loan from a credit union

5.00%

12 to 24 months

$500 - $3,000

None listed

Pros
  • Low APR
  • Choose loan term and amount
  • Loan funds earn interest
Cons
  • Must become a member of DCU to get loan
  • Charges interest

What to know

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Digital Federal Credit Union (DCU) offers a low-cost credit-builder loan to its members. While you will need to pay a 5.00% APR, your funds will earn interest in a savings account as you pay off your loan. This will help offset the (already competitively low) cost of your loan.

You will need to become a member of DCU to get a loan, but you can easily qualify by joining one of their partner organizations.

How to qualify

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DCU doesn’t specify its eligibility requirements for a credit-builder loan, but you will need to become a member of DCU to get a loan. You can qualify for DCU membership by being related to a current member, working at a partner company, living in a qualifying community or joining a partner organization.

MoneyLion: Best for money management tips

5.99% - 29.99%

12 months

Up to $1,000

$19.99/month membership fee

Pros
  • Loan money earns interest
  • No credit check
  • Reports to all three credit bureaus
  • Customized advice on building credit
Cons
  • High maximum APR
  • Monthly membership fee

What to know

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Fintech company MoneyLion uses technology to bring you custom money management advice as you pay off your credit-builder loan. Your loan money will earn interest that can help you recoup money spent on interest payments, and you won’t have to undergo a hard credit check to qualify.

Be sure to shop around before accepting a MoneyLion loan, since its interest rates can be steep. You should also budget for the monthly membership fee, which is currently $19.99.

How to qualify

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MoneyLion doesn’t specify approval requirements for its credit-builder loan, but you can check whether you’re eligible by prequalifying. This will allow you to see your rates without the damage to your credit that comes with a hard credit pull.

Are credit-builder loans worth it?

Taking out a credit-builder loan is a solid financial decision if you want to build credit from scratch and can afford the monthly payments. If you already have debt, explore alternatives to improve your credit score.

A study by the Consumer Financial Protection Bureau showed that borrowers with no existing debt benefitted from credit-builder loans, while people with debt did not see the same positive results. Here’s what it found:

  • Borrowers were 24% more likely to have a credit score after taking out a credit-building loan, but only if they did not have any existing loans already.
  • After paying off a credit-builder loan, debt-free borrowers’ credit scores went up 60 points more than those with existing debt.
  • Credit-builder loans caused a slight drop in credit scores for borrowers already in debt.

Credit-builder loans pros and cons

Credit-building loans aren’t the best choice for everyone. Review the pros and cons before jumping into a contract.

ProsCons
 Generate a credit score. Credit-builder loans can help you bulk up your credit profile if you have no borrowing history.

 Higher odds of approval. It’s easier to qualify for a credit-building loan than a traditional loan.

 Lower APRs. Credit-builder loans usually have lower interest rates than credit-builder credit cards.		 Can be risky. If you miss a payment, your credit score will likely drop.

 Not free. You will likely have to pay interest or other fees on your credit-builder loan.

 Requires debt. Credit-builder loans are just another form of debt that you’ll need to pay back.

 Ties up funds. Unlike other loans, credit-builder loans require payments before releasing your funds.

How to build credit with a credit-builder loan

1. Evaluate your budget. Use a loan calculator to ensure you can afford the monthly payments along with any additional fees. If you miss payments because the loan doesn’t fit in your budget, taking out a credit-builder loan will likely do more damage to your credit score than good.

2. Compare offers. Since every credit-building loan offers different features, check out more than one lender to find the loan with the lowest APR and fees. Prioritize loans that offer prequalification. You’ll see your rates without damaging your credit with a hard credit pull.

3. Make your payments on time. Taking out a credit-builder loan doesn’t automatically improve your credit. It’s up to you to build your score by making on-time payments. A late or missed payment can leave you worse off than when you started.

4. Check your credit score. Track your progress as you build your credit. You can check your credit score for free with LendingTree Spring, and you’ll also get credit alerts to notify you of changes in your score.

5. Bulk up your emergency fund (if possible). If you have no other use for the loan funds, transfer the money to an emergency fund in a high-yield savings account to earn ample interest. This can help you avoid falling behind and damaging your credit when you face unexpected expenses.

Alternatives to credit-builder loans

Loans aren’t the only way to build or improve your credit. Consider these alternatives:

Secured credit cards

Like a credit-building loan, a secured credit card requires payment before you can access your funds. After you make an upfront deposit, the issuer will give you a credit card with a limit equal to your deposit.

Unlike a credit-building loan, you’ll be able to use your card right away, and you’ll have to pay back what you borrow each month. Once you’ve proven yourself to be a responsible borrower, the issuer might offer you a traditional credit card (and refund your deposit).

Become an authorized user

A trusted friend or family member can add you as an authorized user on their credit card. Authorized users can use the card to make purchases, but they aren’t responsible for making payments. As long as the account holder pays off the card on time every month, you’ll build or improve your credit.

Keep in mind, though, that if the account holder falls behind on their payments, both of your credit scores will suffer.

Pay down your current debt

The amount you owe to creditors for revolving debt (like credit cards) makes up 30% of your credit score. This debt also impacts your credit utilization ratio, or the amount of available credit you’re using at the moment.

If you already have revolving debt, improve your score by paying down what you currently owe. You’ll save money on interest payments while you’re building your credit.

Frequently asked questions

Yes. Although credit-builder loans are easier to qualify for, the lender will deny you if you don’t meet its minimum requirements.

In short, yes. Paying off a credit-builder loan early defeats the purpose of getting a loan to establish a positive payment history. The longer your credit-builder loan is open and the more on-time payments you make, the more you extend your credit history and demonstrate that you’re a responsible borrower.

Borrow as much as you can comfortably pay back. If you can’t make your loan payments on time (every time), you’ll take a hit to your credit score, defeating the purpose of the loan.

How we chose the best credit-builder loans

To choose the top four credit-builder loans available to consumers across the United States, we systematically reviewed and evaluated the top credit-builder loans currently on the market. We rated lenders across fifteen data points in these three categories:

  • Rates and terms (40%): To receive top marks, lenders must offer competitive interest rates, low fees and flexible repayment terms.
  • Repayment experience (40%): We used trusted third-party sources like the Better Business Bureau and Trustpilot to assess the customer experience with each lender. We awarded points to lenders who refund interest and put funds into an account that earns dividends.
  • Accessibility (20%): We gave lenders points for making their loans available to consumers nationwide, for not requiring membership to get a loan and for skipping a hard credit pull when evaluating loan eligibility.

Based on our comprehensive rating system, we determined that the best credit-builder loans come from Credit Karma, DCU, MoneyLion and BMO.