Is a credit builder loan right for you?

By Athena Valentine Lent

Reviewed by Betsalel Cohen

Feb 25, 2024

Read time: 7 min

Young couple renters pose in own modern home look in distance dreaming planning

Key takeaways:

  • Credit builder loans are an alternative way to build or rebuild your credit profile.

  • Credit builder loans are fairly easy to get. They’re designed for people with lower credit scores. 

  • The main downside is that you don’t get access to the money until after you’ve paid it back. 

It’s a brilliant move to take a proactive approach to building strong credit—long before you need to fill out applications for loans or credit cards. When that time comes, you’ll want to be approved, and you won’t want to be stuck with only the most expensive options. 

Spoiler: there’s nothing magic about good credit. It comes from taking small, smart steps consistently over time. 

This is where the journey gets exciting, and you get to be in the driver’s seat. You’re ready to start laying the groundwork, but figuring out where “Go” is can be a little tricky. Let’s look at credit builder loans and how you could use one as a stepping stone to a great credit profile that'll unlock the best deals.

Achieve is not a Credit Repair Organization and does not provide, or offer, services or advice to repair, modify, or improve your credit.

What is a credit builder loan? 

A credit builder loan isn’t like traditional loans. The point is to establish a positive payment history and improve your credit standing. You make payments, and the lender reports those payments to the credit bureaus. 

But you don’t get the loan funds when you’re approved. The money is deposited into a savings (or sometimes investment) account on your behalf. That account is held by the lender. As you make payments, the loan funds are released to you. Some lenders wait until you’ve paid off the loan in full before they release the loan funds to you.  

How credit builder loans work 

A credit builder loan could help you improve your credit standing if you demonstrate that you can handle monthly payment responsibilities by making your payments consistently and on time. The lender should report your payment history to the major credit bureaus—Transunion, Equifax, and Experian—or the loan won’t help you improve your credit profile.  

If you handle the account responsibly, your credit standing could improve. A stronger credit profile could help you get the financing you need, at terms you can afford, in the future.

How to get a credit builder loan 

You can look for a credit builder loan at your local credit union or community bank. You might also find one online. 

Get ready before you apply by gathering certain information that the lender may ask for:

  • Your employment history 

  • Proof of income (usually pay stubs)

  • Information about other debts you have

  • Checking account information, to set up automatic payments (not always required but an excellent way to make sure you maintain a perfect payment history)

Advantages of credit builder loans

Here are the pros to consider when deciding if a credit builder loan is right for you. 

High chance of being accepted 

Lenders have more flexible criteria for credit builder loans (because it’s risk-free for the lender—they aren’t giving you any money up front), so your chances of being approved are high. The main focus will be on getting you a payment you can afford. They’ll want to set you up for success. 

Could improve your credit score 

Credit-builder loans are designed to help you build or rebuild credit. Making on-time payments helps you look more creditworthy and more likely to repay your debts.  

A way to save

Since the loan money is held by the lender until you pay it off, you are in effect saving money in monthly installments. Not being able to access the cash until the loan is paid off could help you build a nest egg.

Downsides to getting a credit builder loan

No access to cash until the loan is fulfilled 

Don’t count on using your credit-builder loan money right away. A few lenders let you access limited amounts of cash as you make payments, but some require you to pay back the loan in full before you can access the money. 

You’re paying for a credit score

Normally, we’re willing to pay interest because we get the opportunity to use someone else’s money when we need it. In this case, nobody gives you access to their money. Since you’ll pay interest, and possibly lender fees, for the loan, and you won’t be able to use the money until after you make payments, you’re essentially paying for a better credit score

That doesn’t mean it’s not worth it, especially if it’s important to you to build healthy credit on your own. 

Results could take months

You might need to make several months of on-time payments before you notice a change to your credit standing. That’s partly because to have a credit score at all, you need to have at least one account that’s six months old. If you have other credit data in your credit file, you might notice the effect after anywhere from a month to a year. The time frame is different for everyone and depends largely on what you’re starting with.

Pro tip: Results can be positive or negative. If you don’t pay on time, your credit standing could suffer. 

A smart solution built for you

Find the right loan in a fast, simple, and stress-free way.

Other ways to build or rebuild credit 

If a credit builder loan isn’t a good fit, there are other ways to boost your credit profile.

Apply for a loan with a co-signer

You could apply for a loan with a co-signer. As co-signers, you both get access to the loan funds, and you both have legal responsibility for repaying the loan. This could be a good strategy if you can’t qualify for the loan you want on your own, your co-signer has stronger credit, and they don’t mind borrowing money with you. 

Become an authorized user

You could ask someone to add you as an authorized user on their credit account. As an authorized user, you get the benefit of the payment history and credit utilization on the account. Those are the two most important factors in any credit score. If the account is at least six months old, you get the credit benefits on day one after you’re added. 

To be an authorized user or co-borrower, choose a financial partner who has good payment habits and keeps their credit card balances low. Otherwise, the shared account could have a negative effect on your credit, and that defeats the goal.

Kickstart new financial habits 

Building healthy credit isn’t hard. Here are some good financial habits that could help you.

  • Learn how to budget and set aside enough money to cover your bills each month.

  • Always pay on time. Late payments will kill your credit.

  • Try not to carry a balance on your credit cards. If you have to, pay it down as soon as you can. The higher your credit card balances are, the more they could hurt your credit.

  • Don’t apply for new credit accounts unless you really need to.

  • Get your free credit reports at least once a year from and check them for errors. If something doesn’t look right, ask for correction. Some errors could affect your score.

Get a secured credit card 

A secured credit card could help you build strong credit. You have to make a cash deposit, which will be held by the lender. Then you can use the credit card like any other credit card. If you make purchases, you’ll get a bill that you’ll need to pay. If you don’t pay off your balance each month, you’ll be charged interest. After a period of responsible use and on-time payments, usually 6-12 months, you can apply for a traditional credit card and ask for your deposit back. 

Report your rent

Rent payments don’t get reported to the credit bureaus unless you opt in. Some landlords offer rent reporting for free. If your landlord doesn’t report rent, you could sign up for a service that's set up to verify the payments and report to the credit bureaus, and you might pay a small fee. 

What’s next? 

  • Do your budget and decide how much of a payment you can afford.

  • Use a free credit score website to check your own credit, so you’ll know where you stand before you apply. Checking your own credit score or credit report never hurts your score.

  • Talk to 2-3 lenders. You’ll pay loan fees and interest, so compare offers before you choose.

Athena Valentine Lent

Athena is one of Achieve’s content writers. She’s an award-winning advice columnist for Slate Magazine and author behind “Budgeting For Dummies” (Wiley 2023). Her writing has appeared in BuzzFeed, Tripadvisor, The College Investor, GOBankingRates, KeeperTax, and her personal website, Money Smart Latina.

Betsalel Cohen - Author

Betsalel is a contributing writer for Achieve. Passionate about helping people improve their finances. He worked in mortgage banking, private banking, and personal financial coaching. When he is not working, he loves running and spending time with his family.

Frequently asked questions

Yes, you could pay off a credit builder loan early. However, the point of a credit builder loan is to establish a history of on-time payments. You might get the greatest benefit where your credit is concerned if you stick to the original terms and pay the loan off on schedule.

Whether to get a secured credit card or a credit builder loan depends on your financial goals. If you want a secured credit card, you’ll need to pay a deposit. In contrast, there may be no out-of-pocket costs to get a credit builder loan. 

With a secured credit card, you get immediate access to credit (the ability to spend someone else’s money). With a credit builder loan, you won’t get access to the money until you make payments.

A credit builder loan could help you improve your credit standing. The higher your credit score, the less risky you look to lenders. But getting a credit builder loan can’t guarantee approval.

Article Topics

Personal loans designed with you in mind

Find the right loan in a fast, simple, and stress-free way.

At Achieve, it’s not what we stand for, it’s who.

Achieve Person