What Is a Credit Builder Loan?
7 Min Read | Published: May 23, 2025
This article contains general information and is not intended to provide information that is specific to American Express products and services. Similar products and services offered by different companies will have different features and you should always read about product details before acquiring any financial product.
Credit builder loans can help people with limited or no credit history establish a credit profile. Learn how credit builder loans work and who they’re best for.
At-A-Glance
- A credit builder loan may be a useful financial tool to help people who are credit invisible or have a thin credit file to build credit.
- Credit builder loans use the loan proceeds as collateral, only turning over the loan balance to the borrower once the loan is paid in full.
- Alternatives to credit builder loans include secured credit cards and becoming an authorized card user on someone else’s credit card.
Whether you’re new to the U.S. or new to credit, it can be frustrating to keep getting turned down for loans and credit cards. One effective way to establish a strong credit profile is by using a credit builder loan. These loans may be easier to qualify for than traditional loans, and since they can be for low amounts, they may be easier to afford payments on.
Here’s what you need to know before you jump into applying for a credit builder loan, as well as some alternatives to consider.
What Are Credit Builder Loans?
A credit builder loan is designed for borrowers with limited or no credit history. It can help them establish credit similar to other installment loans, like a personal loan or auto loan.
Here’s how a credit builder loan works.
- Apply for the Loan
Eligibility requirements for a credit builder loan may be less stringent than those for other types of traditional installment loans, like a personal loan or auto loan. You’ll still need to provide basic personal and financial information, including proving that you have a source of income to make loan payments. - The Lender Moves Money to Fund the Loan into a Separate Account
If you’re approved for a credit builder loan, your lender will move money to fund the loan into a savings account or certificate of deposit (CD). This is different than other installment loans, in which case you’d receive your lump sum loan amount once it’s approved. By holding the money in an account at the lending institution, the lender decreases their risk by ensuring you make all loan payments before releasing the money. - You Make Payments to the Lender
You’ll make payments, including interest, each month according to the schedule outlined by the lender. As you make timely payments, the lender reports them to the credit reporting bureaus. But remember that late or missed payments could also be reported, meaning that if you fail to manage the loan responsibly, it could hurt your credit score. - You Receive the Money Once the Loan is Paid in Full
With many lenders, you can only access the money for a credit builder loan once it’s paid in full, though some may release smaller loan amounts with each payment. After you pay the loan in full, the lender releases the balance to you. Then, you’re free to use the money for its intended purpose, and you’ve also done something beneficial to build your credit score.
Benefits of Credit Builder Loans
There are several benefits of credit builder loans, especially if you’re struggling to get approved for other types of credit, like a credit card, because of a limited credit history.
- May Help Encourage Savings
Unlike a personal or auto loan, which you might take out for a specific purpose, you can use a credit builder loan to begin saving for a particular goal. Creating the habit of setting aside money each month may help you improve other financial habits, too. - More Flexible Eligibility Standards
Since credit builder loans are designed for individuals with limited or no credit history, the requirements to qualify may be more flexible than other types of credit or loans. - Can Improve Credit Score
If you can responsibly manage your credit builder loan and make payments on time and in full, it may help improve your credit score over time. - May be Approved with No Hard Credit Check
Since lenders rely on factors like income instead of credit score, you may be approved for a credit builder loan without the lender issuing a hard credit check. This is good news since a hard credit inquiry can cause your score to dip by a few points temporarily.
How to Build Credit With a Credit Builder Loan
Building credit from scratch with a credit builder loan takes time. Credit builder loans can be small dollar loan amounts of less than $1,000 with payment terms that run from six to 24 months.1
Depending on the terms of your specific loan, it could take half a year or more to see the impact of responsible loan management on your credit score. The best way to ensure a credit builder loan helps improve your credit is to make timely payments. Since payment history is the largest part of calculating your credit score, making payments on time and not having missed or late payments can be beneficial.
Alternatives to Credit Builder Loans
There are several alternatives to credit builder loans that are worth considering if you’re looking to build credit.
- Consider a Secured Credit Card
A secured credit card is similar to a credit builder loan in that it may be easier to qualify for if you have limited or no credit history. If approved, you’ll provide a deposit for the secured credit card account, which becomes your credit limit. You can spend up to the deposit amount and then make payments to the card issuer. If you fail to make the payment, your card issuer can use the deposit to cover the purchases. When you make timely payments, your card issuer reports those to the credit reporting bureaus, which helps establish your credit history over time. - Become an Authorized User
Another way to build credit is by becoming an authorized user on someone else’s credit card. If you have a family member, loved one, or trusted friend with a solid credit score and history, you may be able to leverage that to improve your own credit. As an authorized user, you’ll receive a line of credit on the account and both you and the primary card holder are responsible for ensuring the card balance is paid each month. A pattern of timely payments and keeping the card balance low may reflect positively on your credit report and may improve your score. - Use a Rent Reporting Service
Rent and utility payments may not be reported on your credit report. But there are rent reporting services that can help share this information with the major credit reporting bureaus for a fee. This can be helpful if you’re consistently making timely payments on these bills but haven’t been able to qualify for more traditional types of credit, like credit cards or personal loans.
Credit Builder Loans vs. Personal Loans
There are several similarities and differences between credit builder loans and personal loans.
| Credit Builder Loan | Personal Loan |
|---|---|
| Access to funds once the loan is paid in full | Access to funds up front when the loan is issued |
| May be eligible with limited or no credit history | May require a higher credit score to qualify for the best loan terms |
| Can be secured by loan balance as collateral | May be unsecured |
| Can help you build credit | Can help you build credit |
| Use funds for any reason | Use funds for almost any reason (depending on the loan terms) |
Who May Benefit the Most From a Credit Builder Loan?
A credit builder loan may make sense for someone who is working to establish or build their credit history. This includes people with a zero credit score, a situation known as being “credit invisible.” Before you apply for a credit builder loan, consider these questions.
- Can you afford the monthly loan installments?
- Will you have consistent enough income to cover the loan amount for the entire repayment term?
- How quickly do you need the money?
Assuming you can afford the loan and are willing to wait at least six months to receive the money, a credit builder loan may make sense.
Where Can You Find Credit Builder Loans?
Credit builder loans aren’t available at every financial institution. To find a credit builder loan, look at:
- Online lenders
- Community banks
- Credit unions
Keep in mind that each lender will have unique eligibility criteria and loan terms, so it makes sense to compare lenders to see which one is best for your unique financial situation.
Frequently Asked Questions
The amount of a credit builder loan varies by lender, but generally, they have lower loan amounts of several hundred to several thousand dollars. Check with your lender to see how large of a credit builder loan you can get and be sure you can afford the monthly payments before applying.
Whether a credit builder loan is a good idea depends on your financial situation and needs. A credit builder loan may make sense if you’re “credit invisible” or have a thin credit file and can afford the monthly payments.
The Takeaway
A credit builder loan is one way that someone with little or no credit history may be able to begin to build their credit profile. Since credit builder loans are secured using the loan amount as collateral, borrowers will need to pay the full balance before accessing the funds. This can be an effective way to encourage savings and responsible credit management, but it’s also worth considering alternatives to help build credit, including secured credit cards and becoming an authorized user.
1 “How to Get a Credit-Builder Loan,” Experian
Brooke Joly is a writer on a mission to unravel the mysteries of personal finance and make them accessible to the everyday reader. When she’s not behind the keyboard, you can find her enjoying the outdoors in Charleston, SC.
All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.
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