Best Credit Builder Loans

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A solid credit history is often the key to accomplishing important financial goals, such as getting a mortgage or a car loan. Yet, getting approved for new credit can often be difficult if you have a limited or bad credit history. That’s when a credit-builder loan can come in handy.

This type of loan is strategically designed to help build or improve your credit score, even if your score is less than stellar.

Read on for our reviews of the best credit builder loans, along with a comprehensive guide to how they work and how to apply for one.

Our Top Picks for Best Credit Builder Loans

The companies listed below are organized alphabetically.

• BMO Bank: Best Credit Builder Program from a Bank
• Credit Karma: Best Fee-Free Credit Builder Account
• Credit Strong: Best for Longer Loan Terms
• Digital Federal Credit Union: Best Fixed-Rate Credit Builder Loan

Best Credit Builder Loans Reviews

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Why we chose it: BMO Bank is among the few major banks that offer a credit builder loan program with fixed rates and minimal fees.

BMO offers credit-builder loans of at least $1,000. With BMO the loan funds are placed in a certificate of deposit (CD) account where it accrues interest for the duration of the loan. After paying off the loan, you receive access to the fund plus accrued interests.

BMO’s loan terms range from 24 to 60 months, which is longer than the typical 12 to 24 months length most lenders offer for this type of loan. Additionally, BMO features a 1% rate discount when you enroll in auto-pay from an eligible BMO checking account.

In terms of fees, BMO charges a one-time processing fee of $75. It also charges an early withdrawal penalty if you close the account prior to the CD maturity date.

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Why we chose it: Unlike most credit builder loan providers, Credit Karma offers a revolving line of credit that doesn’t charge interest rates or administrative fees.

Credit Karma’s Credit Builder program uses a revolving line of credit of up to $1,000 to potentially improve your credit score. To apply, you have to open a Credit Karma Money Spend account which requires setting up a monthly direct deposit of $750 or more.

The program works as follows: Upon enrolling, you get access to a credit line and a savings account. You can then set up recurring monthly transfers of at least $10 from the credit line into the savings account, where it remains until you save at least $500. You can access the money once you reach that amount. At the same time, you have to set up automatic payments from your Credit Karma Money Spend account to repay the line of credit.

The advantage of Credit Karma’s Credit Builder program is that it offers the flexibility to pause payments at any time as long as you don’t have an outstanding balance. However, to maintain the account active you have to make one transaction at least once every six months.

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Why we chose it: Credit Strong offers large loan amounts of up to $10,000 and terms of up to 60 months.

Credit Strong features four different credit builder loan options, including installment loan accounts and a revolving line of credit.

With the installment loan accounts — Instal and CS Max — the loan proceeds are locked into a savings account from 24 to 60 months. Payments can be as low as $28, depending on the term and amount you want to save.

As you make on-time payments, Credit Strong reports it to all three major credit bureaus. At the end of your loan term, you receive the principal minus any interest. There is also a non-refundable administrative fee of $15 for Instal accounts and $25 for CS Max Accounts.

In addition to the installment loans, you can choose a Credit Strong revolving account for a $99 yearly fee. This option adds a $1,000 line of credit, which is reported to the bureaus.

Note, however, that you don’t get access to the money. The plan is designed to help you increase your total available credit — which, in turn, lowers your credit utilization ratio and can potentially improve your credit.

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Why we chose it: Digital Federal Credit Union (DCU) offers credit builder loans with fixed interest rates and terms of up to 24 months.

DCU credit builder loan is structured as a secured installment loan. The loan funds are held in a savings account as collateral as you make monthly payments. As with most other credit builder loans, you can access the funds once the loan is fully repaid.

With DCU, you can apply for a loan between $500 to $3,000 with a repayment term of up to two years and a fixed interest rate. The loan also earns dividends during the borrowing period.

To qualify for DCU's Credit Builder Loan, you must become a member of the Digital Federal Credit Union. Membership eligibility typically extends to individuals who live, work, worship, or attend school in specific geographic areas, as well as employees of partner organizations.

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Other credit builder loans we considered

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MoneyLion

MoneyLion features a credit builder membership that allows you to apply for a loan of up to $1,000 with a 12-month repayment period. Unlike other lenders, MoneyLion gives you access to a portion of the loan funds. However, it charges a $19.99 monthly fee and features interest rates of up to 29.99%.

Why we didn’t choose it: In addition to its high interest rates and monthly fees, MoneyLion has a pending government action filed by the Consumer Financial Protection Bureau (CFPB) for allegedly imposing excessive charges to customers.

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Self

Self credit builder loans are structured as installment loans with terms from 12 to 24 months. It offers four payment plans tailored to fit different budgets and saving goals. As with other lenders in our list, Self puts the loan funds into a savings account for the loan term. After the repayment period, you get the money back minus any interest rates and administrative fees.

Why we didn’t choose it: Self holds an F rating with the Better Business Bureau due to a number of unaddressed complaints regarding credit reporting issues.

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Best Credit Builder Loans Compared

Best Credit Builder Loans Guide

What is a credit builder loan?

A credit builder loan is specially designed to help individuals improve or establish their credit score. Since they’re tailored for people with limited credit history or poor credit, credit builder loans usually have more lenient terms and requirements.

This type of loan is often a good option to build credit because it lets you demonstrate responsible borrowing behavior, such as making payments on time, without having to accumulate debt.

How does a credit builder loan work?

Unlike traditional loans where you receive the money upfront and then make payments over time, with a credit builder loan, the lender puts the loan funds into a savings account or a certificate of deposit (CD) for a predetermined period of time, typically from 12 to 24 months. You then make monthly payments until you pay off the loan.

In the meantime, the lender reports your payments to the major credit bureaus — Equifax, Experian and TransUnion — on a monthly basis helping you build a positive payment history if you make payments on time. After the repayment period, you gain access to the funds in a lump sum minus any fees or interest charges.

How to get a credit builder loan

Getting a credit builder loan is relatively easy. However, as with any other loan, there are some steps you should consider before applying.

• Check eligibility criteria: Although credit builder loan lenders don’t require a minimum credit score, they may require evidence of income, employment and U.S. residency. Lenders may also ask for an active checking account with a demonstrable income.

• Review loan terms: Before accepting an offer, pay close attention to details like the interest rate, fees, loan amount and repayment term. Some lenders even offer additional perks such as the possibility of earning dividends or interest rate discounts.

• Gather documentation: You will need to submit documentation to validate your identity, such as a state ID or driver's license. Lenders may also ask for pay stubs or bank statements.

• Apply for the loan: Once you identify a lender, complete the loan application. Depending on the lender, you may be able to fill out the application online or over the phone. Smaller community banks, however, may require you to visit a branch in person. In any case, be prepared to provide personal information, such as your address, Social Security number, income and contact information.

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Other options to build credit

Aside from a credit builder loan, there are other financial products you can consider to build or improve your credit. These include:

Secured credit cards

Secured credit cards are generally considered starter cards, ideal for people with limited or poor credit scores. These credit cards often have higher approval odds because they require an initial cash deposit as collateral when you open the account. The credit limit of these cards is generally equivalent to your initial deposit which, depending on the issuer, typically ranges between $50 and $300.

The best credit cards to build credit generally feature additional perks too, such as cash-back rewards on purchases.

Student loan or student credit card

Responsibly managing student loans can help build your credit too. As with other personal loans, making on-time payments on student loans can positively impact your credit history over time.

If you're a student, you can also consider getting a student credit card. Like secured credit cards, student cards typically have more lenient requirements, making them appropriate for those with a limited credit history. The best student cards also offer neat perks like travel insurance, cell phone protection and reward programs.

Become an authorized user

You can also consider becoming an authorized user on someone else’s credit card account, such as a family member or trusted friend. As an authorized user, you get a linked credit card and both will be able to build credit together.

This strategy can be useful, especially If the primary cardholder has a positive credit and payment history, because it allows you to benefit from the account’s good standing. However, be cautious, as any negative activity, such as a missed payment, can also impact both your credit scores.

More about building credit

• How to Use a Credit Card to Build Credit
• How to Build Credit With a Secured Credit Card
• How to Build Credit Fast
• How to Remove Negative Items From Your Credit Report
• How to Repair Bad Credit
• 6 Best Credit Monitoring Services

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How We Chose the Best Credit Builder Loans

We evaluated a total of 17 different lenders, including online banks, credit unions and alternative lenders. Our top picks were selected based on the following criteria:

• Loan terms: We reviewed loan amounts, the duration of the repayment periods and any specific terms and conditions that may affect the borrowing experience. We preferred lenders that provide a variety of loan amounts and flexible terms.

• Annual Percentage Rate (APR): We favored lenders with the lowest APRs in the market and that offered promotional offers or discounts.

• Fees: We examined lenders’ fee schedules and assessed their impact on the affordability of the loan. We looked for lenders with transparent fee structures and minimal fees.

• Credit reporting: We chose lenders that report loan activity to the major credit bureaus —Equifax, Experian and TransUnion.

• Reputation: We evaluated customer reviews and third-party ratings from independent review platforms, such as the Better Business Bureau, along with any history of consumer complaints, legal issues or regulatory actions. We also made sure that each lender was a member of regulatory agencies like the FDIC or NCUA.

Summary of Money’s Best Credit Builder Loans

• BMO Bank: Best Credit Builder Program from a Bank
• Credit Karma: Best Fee-Free Credit Builder Account
• Credit Strong: Best for Longer Loan Terms
• Digital Federal Credit Union: Best Fixed-Rate Credit Builder Loan