3 Best Credit-Builder Loans (2024 Guide) (2024)

Compare top credit-builder loans

Credit-builder loans can make sense for consumers who need help building credit but haven't found the right opportunity yet. The following lenders offer credit-builder loans with the best rates and terms, as well as some extra perks and features.

To make our top choices, our research team evaluated 14 credit-builder loan companies. We selected three based on factors that are important to borrowers, including the number of credit bureaus reported to, loan amount ranges, loan term lengths and fees. We also considered state availability and annual percentage rate (APR).

Our picks may be Authorized Partners who compensate us. This does not affect our recommendations or evaluations but may affect the order in which companies appear.

• Digital Federal Credit Union
• Credit Karma Money
• Self

Digital Federal Credit Union (DCU) requires a certain type of affiliation to join, such as having a family connection to an existing member or belonging to one of its partner organizations, employers or communities. If someone does meet membership requirements, they can take advantage of DCU’s traditional-style Credit Builder Loan of up to $3,000.

With the DCU Credit Builder Loan, you can “borrow” between $500-$3,000, which you pay back into your savings account over 12-24 months. The APR is set at 5% as of this writing, but the funds paid into a DCU Savings account earn dividends — which essentially means you earn some money back on your loan payments.

As an example, you could receive a Credit Builder Loan for $1,000 with a monthly payment of $43.87 for a term of 24 months. Ultimately, this would leave you paying $1,052.88. At the end of your term, you would then get access to your $1,000 plus an undisclosed amount of dividends earned.

Credit Karma has long been a source for free credit scores and other financial management tools, but the company upped the ante when it launched its Credit Builder in January 2022.

With this plan, you aren’t given money to spend straight away. Instead, the “loan” is locked in as an aid to help you save while you build credit. Credit Karma’s Credit Builder comes with no fees and doesn't charge any interest.

Getting started requires you to first open a Credit Karma Money Spend account. From there, you set a Credit Builder plan, deciding how much you want to save and how often. Credit Karma’s partner company, SeedFi, then deposits your savings into a locked account, which you pay back according to the terms of your Credit Builder plan.

While you work toward this goal, Credit Karma reports your payments to the three major credit bureaus.

Once your savings reach the $500 threshold, that money is moved to your Money Spend account. You can then continue saving on your own or through automatic transfers, or you’re free to spend the money you’ve saved.

Self is a financial company that offers products to help you build credit. For starters, Self offers its Credit Builder Account, in which you make payments to a bank-held certificate of deposit (CD) that will be refunded to you, minus fees and interest.

You also have the option to apply for a Self Visa Credit Card (a secured card) to go along with your Credit Builder Account. You just have to meet basic requirements, including making three on-time payments, having $100 or more saved and keeping the account in good standing.

The credit-builder loan itself is offered in four different versions, with total payments ranging from $600 to $3,600. Essentially, you will make a monthly payment between $25 and $150 for 24 months, during which your payments are reported to the three credit bureaus.

A $9 administrative fee applies to each account, as well as APRs ranging from 15.72% to 15.97%.

Pros and cons of credit-builder loans

The main advantages of credit-builder loans depend on the type of product chosen. For example, some credit-builder loans (like those from Digital Federal Credit Union and Self) make it possible for you to build up your savings and build credit at the same time.

Meanwhile, credit-builder loans that come with secured credit cards or debit cards help you get in the habit of making on-time payments, and make it easy to make purchases using your saved-up funds.

But the biggest advantage of these accounts is the ability to build credit. Payment history is the largest factor of your credit score, so when on-time payments to a credit-builder loan are reported to the three credit reporting agencies — Experian, Equifax and TransUnion — this reflects positively on your credit usage and provides a much-needed boost in this category.

There are a few downsides to credit-builder loans, which depend on the type of product and your individual situation. For starters, some credit-builder loans require your income and employment to be verified.

Not only that, but credit-builder loans have the potential to backfire if you don't use them wisely. If you don’t make your payments on time, your loan could end up negatively affecting your score.

Alternatives to credit-builder loans

If you like the idea of a credit-builder loan but want to consider all your options, the following financial products could work in place of a credit-builder loan.

• Credit-building apps: A feature called Experian Boost lets you build credit using alternative data like streaming services you pay for and your utility bill payments. This is free, so you can benefit whether you get a credit-builder loan or not. The catch is this only helps you with your Experian credit report (not with Equifax or TransUnion).
• Secured credit cards: Secured credit cards let you put down a cash deposit as collateral, at which point you receive a credit limit of the same amount. As you use the secured card for purchases and make payments, this information is reported to the credit bureaus on your behalf.
• Secured personal loans: There are also secured personal loans to consider, which require collateral like cash in a savings account or the title of a car you own. The collateral will be seized if you fail to make payments, but these accounts also build credit since they typically report to the three credit bureaus.
• Becoming an authorized user: If you have a family member or trusted friend with good credit who is willing and able, you can also become an authorized user on their credit card account. The best part is, being an authorized user can help you build credit whether the primary cardholder gives you access to the authorized user card or not.

Bottom line

If you have poor credit or no credit and you can't find any financial products that you will be approved for, a credit-builder loan may be the answer. These loans are available to nearly anyone, and a credit check isn't required in most cases. Credit-builder loans help you build credit as you make on-time payments, which can make it easier to qualify for better financial products and loans down the line.

Just remember that credit-builder loans are only tools, and they can make your credit even worse if you forget to make payments on time.