Around 30% of American adults have a subprime credit score – that is, a credit score below 670. Another 20% of Americans are “credit invisible,” meaning they have no credit history or credit score. These numbers have improved in recent years, but having a “poor” or “fair” credit score is still quite common today.
Since many facets of society rely on a person’s creditworthiness, from getting a mortgage to qualifying for a personal loan, it’s important to build credit. For those who need to establish or repair their credit, a credit-builder loan can help. Here are the 11 best options.
Most popular credit-builder loans
Considering a credit-builder loan to help establish or rebuild credit? Here are some of the best options right now:
Best overall credit-builder loan
Self Financial, Inc.
- Offers credit-builder loans and a secured credit card
- Loan terms range from 12 to 24 months
- Reports to all three major credit bureaus
- No upfront security deposit required
- No credit score required
- No hard inquiry
- One-time $9 fee to open an account
- Monthly payments range from $25 to $150
- APR varies but has an average of 15.65%
- Overwhelmingly positive reviews online
- Successfully helped 1+ million consumers build credit
- Option to apply for a secured credit card after three months of on-time payments and a positive balance of at least $100. The card is linked to the credit-builder account and also helps build credit.
Watch this video to learn more about the pros and cons of a Self credit-builder loan.
Best online loan options
Credit Strong
- 7 plans to choose from to build credit without the need for a credit card
- Monthly payments from $15 to $110
- 120-month maximum loan term
- APR ranges from 5.85% to 14.89%
- Free access to FICO 8 score
- Administrative fee from $8.95 to $25, depending on the plan
- Not available in Wisconsin or Vermont.
Money Lion
- Mobile banking app with Credit Builder Plus Loans
- Annual APR from 5.99% to 29.99%
- $1,000 maximum loan amount
- Borrowers may receive a portion of the loan immediately, similar to a traditional loan
- Loan terms up to 12 months
- Weekly, biweekly and monthly installment options
- Over half of members saw an average credit score increase by 42+ points in two months
- Mobile app for checking loan balance and setting up automated payments
- No credit score required
- No hard inquiry
- $19.99 monthly membership fee
Credit union loans
Metro Credit Union
- $500 to $3,000 loan amounts
- Maximum loan term is 24 months
- APR starts at 4.10%
- Must be a member of the credit union to qualify
- Balance in savings account accrues interest as you make payments.
RBFCU
- $300 to $2,500 loan amounts
- 6- to 36-month terms
- APR starts at 7.700%
- No fees besides interest
- Option for early repayment, but doing so will not help build credit
- Portion of the interest is paid back in dividends into the savings account to further grow.
Digital Federal Credit Union
- $500 to $3,000 loan amount
- 12- to 24-month loan terms
- Fixed APR of 5%
- Some interest returned in dividends to the savings account to help build savings
- Available nationwide
- Hard inquiry
USAlliance Financial
- Terms range from 12 to 24 months, ranging from $500 to $2,000. Qualifications, terms, and rates are based on qualifying criteria such as income and credit determined when opening an account.
- Membership is not a requirement to apply. But you will need to establish membership once U.S. Alliance Financial provides you with the approval.
- There are many different ways to qualify for membership at U.S. Alliance, including:
- Association
- Employer
- The location where you live/work/or worship.
If you do not qualify, you can join one of their partnership associations for free during the application process.
Bank loans
Heartland Bank
- Credit-builder loans range from $500 to $1,500
- Half of the loan is placed in a bank account, while half is immediately available
- $25 account closing fee
- Requires 6+ months stable income and Certificate of Completion from a financial education class to qualify.
Hawthorn Bank
- $500 to $2,500 loans
- 12, 18 or 24-month payment periods with monthly installments
- Average APR is 6.575%
- $25 origination fee
- $25 VISA Gift Card if you successfully participate in their financial education program.
Republic Bank
- $500 to $1,500 loans
- 12, 18 and 24-month loan terms
- APR ranges from around 5.373% to 8.055%, depending on the terms and loan amount
- Money is placed in a certificate of deposit and earns interest for the duration of the loan
- Borrowers may withdraw the funds at the end or leave them to accrue interest
- Monthly loan payments starting at $21.89
- $10 processing fee
Sunrise Bank
- Loan terms are 12 months or 18 months.
- The loan funds are placed in a CD, and monthly repayments are approximately $50.
- SSN or ITIN is required for loan applications. Individuals using an ITIN must apply in person.
- Certificate of Deposit and loan rates may vary, and fees may apply. If you do not have a Sunrise checking or savings account, they will provide you with a check.
How fast do credit-builder loans build credit?
Building credit takes time and involves various factors such as:
- Borrower’s current credit score
- Any other open lines of credit or loans
- Average age of accounts
- Derogatory marks like foreclosure or bankruptcy
For those with no existing debt or credit score, it could take anywhere from two to six months to start building credit. For people with poor credit or delinquent accounts, it may take longer.
To help build credit faster, make on-time payments, let open accounts age to build credit history and get a mix of credit (loans, lines of credit, etc.)
READ MORE: Everything you need to know about credit-builder loans
How much do credit-builder loans cost?
The cost of a credit-builder loan depends on a few variables, including:
- Most loans range from $200 to $2,000. Longer loan terms or higher amounts accrue more interest or may have higher monthly payments.
- APR varies from around 5% to 12%, depending on the lender, loan term and loan amount.
- Some lenders charge an upfront, one-time administrative or loan origination fee. Others charge a monthly fee. Longer loan terms may mean more fees.
- Some lenders charge for late payments.
Before agreeing to get a credit-builder loan, determine how much it will cost and whether or not it fits into your budget.
Other options or small loans to help you build credit
Here are a few other ways to help establish or repair credit.
Share- or certificate-backed loan: With this option, your current financial institution uses the money you already have in an active account as collateral to help you build credit. The institution may freeze a set amount of money in the account for you to repay over time. Some institutions may “thaw out” the money as it’s repaid, thus granting the borrower access to their money. All payments are reported to the credit bureaus.
Authorized user: If you have a friend or family member with a credit score above 670, ask if they’re willing to make you an authorized user on their account. By becoming an authorized user, you can start building credit even if you never actually use the account. As long as the primary account owner makes on-time payments on the account, this will benefit both users. Alternatively, become a co-signer on an auto or other loan.
Secured credit card: Secured credit cards use the consumer’s own money as collateral to build credit. Most secured credit cards require an initial cash deposit of around $300, which in turn serves as the consumer’s credit limit. Make regular, on-time payments to boost your credit score and increase your credit limit.
Installment loan: Installment loans can be used to build credit if the lender reports to the credit bureaus. However, many lenders charge astronomical interest rates and have other hidden fees, so check the lender’s reputation and the loan terms before signing anything binding.
Secured loan. Secured loans use the borrower’s collateral – home equity, car, etc. – to help build credit, so they pose minimal risk to the lender. This makes them ideal for those with no or bad credit. The loan amount is usually equal to the value of the collateral. The downside is that failure to pay the loan could result in credit ruination and the loss of that collateral.
The bottom line
Creditworthiness is important, but it can be difficult to build a solid credit history when you’re struggling day-to-day with debt. A credit-builder loan can help you establish credit and get your financial situation under control.
FAQs
Since credit-builder loans are made for people with poor or no credit, most lenders don’t run a credit check when deciding whether to give them a loan or not. Some lenders may run a soft inquiry into the borrower’s credit, but this doesn’t impact their credit score.
Although good credit isn’t required for a credit-builder loan, most lenders do require proof of income. They may also check the borrower’s debt-to-income (DTI) ratio to ensure the borrower can make payments on the loan. The exact requirements vary by lender.
Taking out a credit-builder loan comes with a certain level of risk. If you are unable to make payments, you may end up damaging your credit score rather than giving it a boost. Lenders like Digital Federal Credit Union run a hard inquiry when checking an applicant’s credit. Hard inquiries stay on the credit report for up to two years and could result in a temporary score decrease.
Most lenders only offer one credit-builder loan at a time. After the initial loan is fully repaid, the borrower may then apply for a new one. It may be possible to get another credit-builder loan through a different lender, but make sure it fits into your budget and long-term plans before going this route.
Only take out a credit-builder loan as needed. These loans are designed to help those with no or subprime credit save money. Once your score is high enough and you’ve established positive payment history, consider other financial products like personal loans or credit cards instead to continue building credit. In most cases, the longer an account is open and in good standing, the better the impact it has on your credit score.
Credit-builder loans are designed to help you build savings, while payday loans are short-term, small-dollar loans with high interest rates that are repaid from your next paycheck. Because many payday loan borrowers lack savings, paying the loan back in a matter of a couple of weeks can be very difficult, and often forces borrowers to take out a second, more expensive payday loan.
