Short answer: a credit builder loan works backwards from a normal loan. The bank or credit union holds the loan amount in a savings account, you make small payments, usually over 6 to 24 months, and at the end you get the money you paid in (CFPB). Your payments are reported to the credit bureaus, so it can help you build a credit history. A CFPB study found it helped people with no existing debt most, and could hurt people already juggling other loans (CFPB, 2020).
How it works, step by step
- You apply at a bank or credit union that offers the product.
- The lender puts the loan amount into a locked savings or certificate account. You cannot spend it yet.
- You make fixed payments, including any interest and fees, usually over 6 to 24 months.
- The lender reports your payments to one or more of the nationwide credit bureaus.
- When the loan is paid off, the account is released to you.
Because you get the money only at the end, a credit builder loan is not a way to get cash now. It is a way to build a payment record and some savings.
What it costs: an example
Assumptions: $1,000 loan, 12 months, 12% interest, no fee. Your actual terms will differ; ask whether the savings account pays interest back to you, which lowers the net cost.
| Item | Amount |
|---|---|
| Monthly payment | $88.85 |
| Total of payments | $1,066.19 |
| Money released to you at the end | $1,000.00 (plus any savings interest) |
| Net cost before savings interest | $66.19 |
Who it helps most: what the CFPB study found
In a 2020 study of credit builder loan users, the CFPB found (CFPB report):
- Participants who started without existing debt were significantly more likely to have a credit score by the end of the study.
- The report says: "Participants without existing debt saw their credit scores increase by 60 points more than participants with existing debt." It adds: "When including all participants, not just those who opened the CBL, the effects of the CBL on credit scores decrease from 60 points to about 12 points." (CFPB report, page 4)
- For participants with existing debt, the loan appeared to cause a slight decrease in scores on average, and it was associated with more late payments on their other loans.
The CFPB suggested that people with existing debt may want to pay down other loans first, or choose another product.
Before you sign up
- Check that the lender reports to the credit bureaus, and to which ones.
- Ask about fees and whether the held savings earn interest.
- Pick a payment you can make every month. A late payment is reported too.
- Get your free credit reports first and fix any errors (FTC).
- For other ways to build credit, see the CFPB list, and our guide to loans with bad credit and no cosigner.
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Disclosure: Modern Lending Solutions is not a lender, loan broker or agent for any lender or loan broker, and does not make credit decisions. Any compensation we receive is paid by participating lenders, only for advertising services. This guide is general information, not financial or legal advice.