Credit builder loan

What It Means

A credit builder loan is a small installment loanInstallment loanA loan you receive as one lump sum and repay in a set number of scheduled payments, such as a car loan, mortgage or personal loan. See more that works in reverse: the lender puts the loan amount in a locked account, you repay it in monthly installments with interestInterest rateThe yearly percentage a lender charges for borrowing money, not counting fees; the APR adds certain fees to show a fuller cost. See more and any fees, and you receive the money once it's paid off. The lender reports your payments to the credit bureausCredit bureauA company that collects information about how people use credit and sells it as credit reports; Equifax, Experian and TransUnion are the three nationwide ones. See more, so paying on time builds a credit recordCredit historyThe record of how you've handled credit over the years, as shown on your credit reports: which accounts you've had, for how long, and whether you paid on time. See more. According to the Consumer Financial Protection Bureau (CFPB), these loans are generally $300 to $1,000 and run 6 to 24 months.

How People Say It

• "The credit union holds the money until I finish paying."
• "It's a thousand-dollar loan I don't get until next year."
• "I'm doing a builder loan because I've got no credit history."

The Breakdown

Worked example. Two example loans, both paid on time:

What the result means. The cost is the interest and fees, the price of a year of reported on-time payments. You get the loan amount back at the end, which works like forced savings. Ask whether the lender pays any interest on the locked account or returns part of what you paid, since that changes the math.

Who it tends to help. The CFPB's 2020 study of 1,531 credit union members found the loan helped most for people who had no existing debt: they became more likely to have a credit scoreCredit scoreA three-digit number calculated from your credit report that lenders use to judge how likely you are to repay; common models run from 300 to 850. See more, and their scores rose more. For people who already carried loans, the effect was small. About 40% of borrowers in the study made at least one late paymentLate paymentA payment that reaches the lender after its due date; on credit reports, one that's 30 days or more past due. See more, and a late payment gets reported like any other.

Good to Know

A credit builder loan only builds credit if the lender reports it, so ask which of the three credit bureaus (Equifax, Experian and TransUnion) receive the payments before you sign. The CFPB's findings come from a July 2020 research report on credit union members, and it found the loans worked better for people without existing debt than for people already carrying it. Because missed payments are reported too, pick a payment you can make every month without strain, and set the due date soon after payday.

Related Terms and Categories

• Secured credit card

  A credit card backed by a cash deposit you pay up front, which usually sets your credit limit; used mostly to build or rebuild credit.

• Credit history

  The record of how you've handled credit over the years, as shown on your credit reports: which accounts you've had, for how long, and whether you paid on time.

• Payment history

  The record in your credit reports of whether you paid each credit account on time, late or not at all; it's about 35% of a FICO Score.

• Credit score

  A three-digit number calculated from your credit report that lenders use to judge how likely you are to repay; common models run from 300 to 850.

• Credit union

  A not-for-profit financial cooperative owned by its members, offering accounts and loans to people within the field of membership its charter sets.

• Installment loan

  A loan you receive as one lump sum and repay in a set number of scheduled payments, such as a car loan, mortgage or personal loan.

Debt and credit