Credit Builder Loans – What Are They and Do They Really Work

March 31, 2022


When you apply for a home or vehicle loan, lenders look at your credit history to determine whether or not to sanction your loan request. Your credit score will also influence the interest rates you are asked to pay. But what if you have no credit history or only a thin history? Does that mean your loan request won’t get approved? Depending on your income, it could get approved, but it’s better to have a good credit history to request loans in most cases. With that being said, there are ways to improve or build your credit history with the help of “credit builder loans.”

Let’s understand what a credit builder loan is and how it works?

What Is a Credit Builder Loan?

When your financial struggles could really use a personal loan, you go to a lender, fill out a personal loan form, and wait for it to get approved. With a credit builder loan, the idea is to build your credit first and then get the money.

With a credit builder loan, you get approval to borrow a certain amount of money from the lender. That money is then deposited in an interest-bearing savings account. You would be required to repay the amount with interest over some time. Once you have paid the entire amount with interest, the lender lets you access the funds in the savings account and any interest you might have earned. The lender then reports your credit history to the big credit bureaus. This helps you build your credit score.

How can I apply for a credit builder loan?

There are many credit unions and community banks that offer credit builder loans. You can also look for online lenders or finance companies that offer better interest rates. You don’t need to have a good credit record or a long one to get approved for a credit builder loan.

These loans are meant to help you rebuild or build your credit history & score. The lenders would charge you a small fee to open the loan account in most cases. Otherwise, you don’t need to get your credit history checked. 

How does a credit builder loan improve your credit history?

For a credit builder loan to work, you must make timely repayments. Additionally, the lender must report all the payments you make to the credit bureaus. Hence, you must choose a trustworthy lender or a finance company with a good track record of reporting such loan payments to all the bureaus. 

Another thing to remember is that the lender isn’t obligated to report to all three major credit bureaus. So, it falls on you to ask them to report to the three major bureaus: TransUnion, Experian, & Equifax. This part is crucial because every credit bureau assigns a score based on their record information.

How much do credit builder loans cost?

To open a loan account for credit builder loans, you will have to pay an upfront fee. After that, the interest rates the lenders offer depend on various factors, like who the lender is, the amount you are requesting, and the duration you can repay the amount. 

Before applying for a credit builder loan, you have to be aware that the lenders can charge you a penalty if you pay off the loan before the date you had previously agreed to in the contract. This is to recover the interests they would lose out on if you pay off the loan ahead of its schedule. 


Credit builder loans can be an inexpensive and easy way to build or rebuild your credit score if you make the repayments on time and ensure the lender reports the payments to all the major credit bureaus. With a bit of care towards your borrowing needs and income, you should be able to repay the loan with no issues. 

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