Is a credit-builder loan a good idea? This question is about 2023's Best Credit-Builder Loans

Yes, a credit-builder loan is a good idea because it’s an easy, low-risk way to establish or rebuild your credit history, especially if you don’t want to get a credit card for one reason or another. With a credit-builder loan, the lender will put money into a savings account for you and you’ll make payments to them over a set time. These payments will add up to the amount of money the lender put in the savings account, plus interest. You’ll get the money in the savings account at the end of the loan term once you make all the payments. Reasons Why a Credit-Builder Loan is a Good Idea Your money may be put in an interest-bearing account. You may get a portion of your interest payments back. If you’re establishing credit from scratch, you may have a score of 630 - 650 by the end of the loan term. The APR range on a credit-builder loan is lower than on a conventional loan or credit card. The lender gives you the money in the savings account in a lump sum at the end of the loan term if you make all your payments. Just because a credit-builder loan is a good way to improve your credit score does not mean it is the best, though. The best approach is to use a credit card, perhaps supplemented by a credit-builder loan, because the issuer will report positive information to the credit bureaus whether you pay the bill on time each month or leave your card with a $0 balance.

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Is a credit-builder loan a good idea?

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This question is about 2023's Best Credit-Builder Loans

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Grace Enfield, Content Writer

@grace_enfield • 12/06/22 This answer was first published on 02/22/22 and it was last updated on 12/06/22.For the most current information about a financial product, you should always check and confirm accuracy with the offering financial institution. Editorial and user-generated content is not provided, reviewed or endorsed by any company.

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Yes, a credit-builder loan is a good idea because it’s an easy, low-risk way to establish or rebuild your credit history, especially if you don’t want to get a credit card for one reason or another. With a credit-builder loan, the lender will put money into a savings account for you and you’ll make payments to them over a set time. These payments will add up to the amount of money the lender put in the savings account, plus interest. You’ll get the money in the savings account at the end of the loan term once you make all the payments.

Reasons Why a Credit-Builder Loan is a Good Idea

Your money may be put in an interest-bearing account.
You may get a portion of your interest payments back.
If you’re establishing credit from scratch, you may have a score of 630 - 650 by the end of the loan term.
The APR range on a credit-builder loan is lower than on a conventional loan or credit card.
The lender gives you the money in the savings account in a lump sum at the end of the loan term if you make all your payments.

Just because a credit-builder loan is a good way to improve your credit score does not mean it is the best, though. The best approach is to use a credit card, perhaps supplemented by a credit-builder loan, because the issuer will report positive information to the credit bureaus whether you pay the bill on time each month or leave your card with a $0 balance.

Answer Question

Will a credit builder loan hurt my credit?

A credit-builder loan can hurt your credit score because some lenders perform a hard inquiry into your credit history when you apply, which can drop your score by about 5 to 10 points. Lenders will also report negative information to credit bureaus if you miss a credit-builder loan payment or make a late payment.... read full answer

However, if you make your monthly payments on time, the lender will report positive information to the credit bureaus, which improves your score. For example, if you're establishing credit from scratch with a credit-builder loan, you should expect to have a score around 630 - 650 by the end of your loan term.

To see how a credit-builder loan may affect your credit, check out the free credit score simulator on WalletHub.

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Do you pay interest on credit builder loans?

What is a credit-builder loan?

A credit-builder loan is an installment loan with fixed monthly payments for someone who wants to rebuild or establish their credit. When you take out a credit-builder loan, the lender puts money into a savings account for you, and you then repay that amount plus interest before receiving the savings account at the end.... read full answer

During the life of the loan, the lender will report your payment history to the credit bureaus. If you pay on time, the information will help your credit. If you don't pay on time, though, you risk damaging your credit score.

What a Credit-Builder Loan Will & Will Not Do

What It Will Do	What It Won't Do
Help you build or establish credit	Let you borrow money
Charge interest	Let you use the money in the savings account while the account is open
Help you get a loan or credit card in the future	Give you back all the money you spend on payments

Most credit-builder loans run from $300 to $1,000, offer loan terms of 6 to 24 months and have an APR range of about 6% to 16%. You still need to pay interest, like with other loans, and you may need to pay a small fee to open the account.

Some lenders may put your money into an interest-bearing account, which can make up for the cost of your APR slightly. Alternatively, lenders might give a partial interest refund. Although you won't get all of your money back, the improvement of your credit is worth it.

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