What Is a Credit Builder Loan

(From the Financial Literacy Blog) – When it comes to your personal finances, your credit score may be one of the most influential factors. It can impact your ability to obtain loans, rent an apartment, or even secure a job. A high score generally means you’ll receive more favorable credit terms when borrowing money, which means you make lower payments and pay less interest. Having a low score can limit your lending opportunities and cost you a lot more money in the long run. If you have poor credit or haven’t established a credit history yet, a credit builder loan can help you build a positive rapport among lenders.

How Does it Work?


• Contact your financial institution. Reach out to your financial institution to see what credit builder loans are available and to voice your interest in improving your credit score. Depending on where you have an account, the credit builder loan may go by different names, such as a fresh start loan or a starting over loan.
• Apply for the loan. Luckily, credit builder loans are designed for those with non-existent or low credit scores, so the application process isn’t as daunting as other lending requests. Decide on the loan amount and range, which is usually around $500 over 6 months or $1,000 over the course of the year. If approved, the money you borrow is deposited into a savings account that you typically can’t access until the loan has been fully repaid. Essentially, the money goes into the account and can only be accessed to make payments on the credit builder loan. This acts as a safety net for the credit union, as they are lending to those with no or low credit.
• Make your payments on time. Throughout the term on the loan, make your payments in full and on time to ensure that your credit union sends a good report to the credit bureaus. Any payments made 30 days after the due date can have a negative impact on your score.
• Collect the money and check your score. After you’ve made all your payments, you have full access to the money you borrowed. Because you completed the loan agreement, there will no longer be limitations on those funds, enabling you to spend your money freely or save it away. Instead of giving you full access to the funds at the end of the loan term, some financial institutions may even give you month-to-month access after each successful payment. Check in with your financial institution for more details on their credit-builder loan terms and conditions. Be sure to also check your score, as it will likely be higher than before. This is, of course, if you didn’t do anything to jeopardize your score while paying off your credit-builder loan.

The Bottom Line

A credit builder loan can provide you with a structured, attainable path to build or repair your credit score. Whether you’re starting from scratch or recovering from past mistakes, a credit builder loan may lead to better credit and financial stability. By making consistent payments and choosing a loan that fits your budget, you can build a foundation on which you can achieve your financial goals.