Credit-Building Loans of June 2024

Secure credit-building loans online from one of the companies vetted by our experts. As of 22.06.2024, you have 1 options available. Boost your chances of approval by completing an application with a free credit score check.
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Updated:
11.06.2024
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Rating by Finanso®
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The rating by Finanso® is determined by our editorial team. The scoring formula includes a financial product type as well as tariffs, fees, rewards and other options.

Recommended FinScore™
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100.00 – 20000.00 $
Rate
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Interest rate

from 0.05 %
Term
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Loan term for the financial product

5 days – 3 months

A credit-builder loan is a type of personal loan designed to help individuals build credit, especially those with limited credit history or poor credit. Unlike traditional loans, credit builder loans don't provide you with an upfront lump sum. Instead, the loan amount is held in a savings account or a credit-builder account while you make monthly payments. These monthly payments are reported to the three credit bureaus, helping to build a positive credit history over time.

Features

  1. Purpose. Credit builder loans are specifically designed for building credit, especially for individuals with low credit scores or limited credit history.

  2. Structure. Unlike a traditional loan, you don't receive the loan amount upfront. Instead, the funds are held in a savings account or a credit-builder account until the loan term is completed.

  3. Loan Payments. You make regular monthly payments, which are an important factor in improving your credit score. All the payments you make are reported to the major credit bureaus.

  4. Payment History. Making on-time payments is crucial. Consistently making payments on time helps build a positive payment history, which significantly impacts your credit scores.

Pros and Cons

Pros

Easier Qualification. Credit builder loans are easier to qualify for than traditional loans, especially for people with poor or no credit histories. They often don't require a credit check, making them accessible to a broader range of individuals.

Improve Credit Scores. If you make regular on-time payments, credit builder loans are a good opportunity to improve your credit scores. Consistently making payments on time contributes positively to your payment history, which is reported to the major credit bureaus.

Better Loan Approval. Higher credit scores mean you’ll have a better chance of being approved for other financial products, such as a car loan, credit card account, or personal loans with more favorable terms and interest rates.

Cons

Impact of Missed Payments. Missed payments can decrease your credit scores and quickly set you back financially. Payment history is a crucial factor in your credit score, and missed payments are reported to the credit bureaus, which can negatively impact your credit reports.

Delayed Access to Funds. You can only access the loan after you repay it, so it’s not a good choice for anyone who needs money immediately. This structure is different from traditional loans, where you receive the loan amount upfront.

Small Loan Amounts. Credit builder loans are only available in small amounts, which might not be sufficient for larger financial needs. They are designed primarily for building credit rather than providing significant funding.

How to Apply for a Credit-Buiding Loan?

Apply for a loan

  1. Explore Potential Lenders. Look into various lenders such as credit unions, community banks, and online lenders that offer credit builder loans. Compare their loan offers, interest rates, and terms to find the best fit for your financial goals.

  2. Choose a Loan Amount You Can Manage. Determine a loan amount that you can comfortably afford to repay. Remember that the loan amount will be held in a savings account or credit builder account until the end of the loan term.

  3. Gather What You Need to Apply. Prepare the necessary documentation for your application. This may include identification, proof of income, and details of any existing debt. Some lenders may not require a credit check, which is beneficial for those with lower credit scores.

  4. Understand the Terms and Conditions. Carefully review the loan terms and conditions, including the annual percentage rate (APR), loan term, and any fees associated with the loan. Make sure you understand how the credit builder loan works, including the importance of making on-time payments.

  5. Submit the Application. Fill out the application form with accurate information and submit it to your chosen lender. If you're applying through a credit union, you may need to become a member first.

  6. Start Making Payments. Once approved, begin making payments as per the agreed schedule. It's crucial to make all the payments on time, as the lender reports your payment history to the major credit bureaus, which helps build your credit scores.

Requirements and Conditions

Requirements

  1. Personal Identification. You will need to provide valid identification, such as a driver's license, passport, or state ID.

  2. Income Information. Lenders will require information about your income to assess your ability to make the monthly loan payments. This may include pay stubs, tax returns, or bank statements showing regular deposits.

  3. Employment Status. You will need to provide details about your employment status. This can include the name of your employer, your job title, and the length of time you've been employed there. If you're self-employed, you may need to provide additional documentation, such as business bank statements or tax returns.

  4. Bank Balances. Some lenders may request information about your bank balances to ensure that you have sufficient funds to manage the loan payments. This can include recent bank statements from your checking or savings accounts.

Conditions

  1. Loan Amounts. Credit-builder loans generally come in increments ranging from $300 to $1,000. These small loan amounts are designed to make the loan manageable and to help you build credit without taking on excessive debt.

  2. Loan Terms. The terms of credit builder loans typically range from six to 24 months. This period allows sufficient time to establish a positive payment history, which is essential for improving your credit scores.

  3. Annual Percentage Rate (APR). The APR for credit builder loans usually ranges from 6% to 16%. The exact interest rate can vary depending on the lender, your financial situation, and the specific loan terms.

Ways to Receive the Money

You generally do not receive the borrowed amount upfront with credit builder loans. Instead, the loan amount is typically held in a savings account or credit builder account by the lender throughout the loan term.

At the end of the loan term, once you have successfully made all the required payments, you will then receive the borrowed amount. This process is different from traditional loans, where you receive the funds upfront and repay them over time.

Things to Pay Attention To

  1. Payment History. Making on-time payments is crucial for building credit. Missed payments can negatively impact your credit scores and set you back financially. Ensure that you make all the payments on time to establish a positive payment history.

  2. Loan Terms. Understand the loan terms, including the loan amount, loan term, and annual percentage rate (APR). Knowing the terms helps you manage the loan effectively and budget for monthly payments.

  3. Lender Reports. Ensure that the lender reports your payment history to the major credit bureaus. Lender reports are essential for building credit as they document your responsible financial behavior and contribute to your credit scores.

  4. Security Deposit. Some credit builder loans may require a security deposit, especially those tied to a secured credit card. Understand the terms related to the security deposit and ensure that you can afford the upfront deposit if required.

  5. Financial Goals. Align the credit builder loan with your financial goals. Whether you aim to build credit, improve your credit scores, or qualify for other financial products in the future, ensure that the credit builder loan serves your long-term financial objectives.

Reasons for Getting Rejected for a Credit-Buiding Loan

  1. Credit Limit. If you have reached or exceeded your credit limit on existing credit cards or loans, lenders may view you as overextended and reject your application for a credit builder loan.

  2. Inaccurate Information. Errors on your credit report, such as incorrect personal information or account inaccuracies, can affect your credit scores and lead to rejection for a credit builder loan.

  3. Unstable Income. Lenders may reject your application if you have unstable or inconsistent income, as it may indicate an inability to repay the loan.

  4. Recent Bankruptcy or Foreclosure. If you have a recent bankruptcy or foreclosure on your credit report, lenders may be hesitant to extend credit to you and may reject your application.

  5. Legal Issues. Legal issues such as liens, judgments, or outstanding collections can negatively impact your creditworthiness and lead to rejection for a credit builder loan.

How to Repay a Credit-Buiding Loan?

  1. Understand Payment Terms. Familiarize yourself with the payment terms of your credit builder loan, including the loan amount, loan term, and monthly payment amount. Understanding these terms helps you plan and budget for repayment.

  2. Set Up Automatic Payments. Consider setting up automatic payments from your bank account to ensure timely repayment of your credit builder loan. Automatic payments can help you avoid missing payments and damaging your credit.

  3. Make On-Time Payments. It's crucial to make all payments on time to build a positive payment history. Missed payments can negatively impact your credit scores and defeat the purpose of the credit builder loan. Set reminders or alerts to ensure you never miss a payment.

  4. Track Your Progress. Monitor your repayment progress regularly. Keep track of your payments and check your credit reports periodically to ensure that your payment history is accurately reported to the credit bureaus.

  5. Plan for Early Repayment. If possible, consider paying off your credit builder loan early. Early repayment can help you save on interest and improve your credit scores faster. However, check the loan terms to ensure there are no penalties for early repayment.

Best Places to Get a Credit-Buiding Loan

  1. Digital Federal Credit Union (DCU) offers credit builder loans with competitive terms and rates. As a credit union, DCU may also provide personalized service and support to help you build credit effectively.

  2. Self is a financial technology company that offers credit builder loans designed to help individuals build or rebuild credit. Self's credit builder loans allow you to save money while building credit, making it an attractive option for those looking to improve their credit scores.

  3. Kovo is a financial platform that offers credit builder loans to help individuals establish or improve their credit scores. They provide flexible loan terms and may cater to individuals with varying credit profiles, including those with limited credit history or lower credit scores.

  4. Credit Strong offers credit builder loans that allow you to build credit while saving money. With Credit Strong, you can choose from different loan options to fit your financial goals and preferences.

Editorial Opinion

Credit-building loans serve as a valuable tool for individuals aiming to establish or improve their credit profiles. By providing access to credit in a controlled manner, credit builder loans work effectively in helping borrowers demonstrate responsible financial behavior. Whether through installment loans, secured cards, or other means, these products offer individuals the opportunity to build a positive credit history. However, it's essential for borrowers to understand the terms and obligations associated with credit builder loans, including making payments to the credit, avoiding missed payments, and utilizing their own money responsibly. Additionally, being an authorized user on a family member's credit card or participating in lending circles can further supplement the credit-building process. Overall, credit builder loans offer a pathway to achieving good credit and financial stability when managed wisely.

Important

Keeping your Debt-to-Income (DTI) ratio below 30-40% of your monthly income is crucial. This will help you avoid potential financial problems in the future. Additionally, always assess the necessity and feasibility of taking a loan, ensuring you can comfortably manage its repayment.

How to Choose a Lender

  1. Make sure to confirm whether the lender is licensed to operate in your state. You can verify this information with your state regulator or attorney general.

  2. Check if the lender is a member of a reputable association, such as the Community Financial Services Association of America. Membership in such organizations may provide an extra level of reliability.

  3. Carefully review all the terms and conditions of your payday loan contract.

  4. Thoroughly examine the interest rates on payday loans and ensure that your contract includes a detailed breakdown of the total cost of the loan.

  5. Take advantage of your right of rescission. Usually, you can rescind the loan within three days after signing the agreement. Alternatively, there is typically a "cooling-off" period, which allows you several days to thoroughly review the contract before making an informed decision to enter into a consumer loan agreement based on the terms specified by the lender.

  6. Choosing a payday lender is a significant decision that demands careful consideration and a good understanding of how such organizations operate.

Additional resources

FAQ

Are there loans to help build credit?

Yes, there are loans specifically designed to help individuals build or rebuild their credit. These are known as credit builder loans. These loans work by allowing borrowers to take on a small amount of debt and make regular payments, thereby demonstrating responsible financial behavior and improving their credit scores.

How much can I borrow with a credit builder loan?

The amount you can borrow with a credit builder loan typically ranges from a few hundred to a few thousand dollars. These loans are often offered in small increments, allowing borrowers to manage their debt responsibly and build credit gradually.

Can I pay to build my credit?

Yes, you can pay to build your credit through various means, such as credit builder loans or secured credit cards. These financial products require you to make regular payments, which are reported to the major credit bureaus, helping you establish a positive credit history. Additionally, some services offer credit monitoring and coaching for a fee to help individuals improve their credit scores.