Credit Builder Loan
How a credit builder loan works, who it helps according to the CFPB's study, what to check before you sign, and a calculator for the payment and the real cost of building credit.
Credit builder loan calculator
How a credit builder loan works
A credit builder loan works in reverse: the lender puts the loan amount, generally $300 to $1,000, in a locked account, you make monthly payments for typically 6 to 24 months, and the payments are reported to the credit bureaus. When you've paid it off, the money is released to you (CFPB). It's a way to build a payment history if you have no credit or thin credit.
Does it work? What the CFPB found
In the CFPB's 2020 study, people without existing debt were more likely to gain a credit score, their scores rose 60 points more than those of borrowers with existing debt, and savings grew by $253 on average. For people who already had debt, scores fell slightly, likely because the extra payment was hard to fit into their budget. So a credit builder loan helps most if you can make every payment on time.
Before you sign
- Check that the lender reports to all three bureaus (Equifax, Experian and TransUnion).
- Compare the total cost: interest plus fees is what you pay to build credit; credit unions are often cheapest.
- A late payment is reported too and can hurt your score.
- Alternatives: a secured credit card, or becoming an authorized user on a family member's card.
Common questions
What is a credit builder loan?
A small loan held in a locked account while you make payments; the payments are reported to the credit bureaus and you get the money at the end.
How much does a credit builder loan raise your score?
It depends; in the CFPB study, borrowers without other debt saw scores rise about 60 points more than borrowers with debt.
Do you get the money from a credit builder loan?
Yes, after you've made the payments, minus any interest and fees you paid along the way.
Can a credit builder loan hurt your credit?
Yes, if you pay late; the CFPB also found slight score drops for people already carrying debt.
Sources
- CFPB: Study shows credit builder loans can help consumers build credit (Jul 2020)
- CFPB: Targeting credit builder loans (research report)
More loan and car calculators: Texas Auto Loan Calculator · Vehicle Refinance Calculator · Credit Freeze · Deferment
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General information, not financial, tax or legal advice. Check important numbers with the official source before acting on them.