Credit builder loan: how it works and what it costs
A credit builder loan is a modest loan that works backward: the lender sets the money aside in savings while you make payments, and it reports every payment, on time or late, to the credit bureaus. Most plans run 6 to 24 months, and at the end you get the money back after interest and fees are taken out.
- Usual loan size
- $300 to $1,000
- Time to pay
- 6 to 24 months
- Up-front deposit
- None
- Sent to
- All three major credit bureaus
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The Money Comes at the End
A normal loan gives you cash up front and you repay it later. This one flips that around. When the loan opens, the lender puts its own money, usually $300 to $1,000, into a locked account.
You make monthly payments, and once the loan is paid off the lender gives you that money, minus interest and fees. And unlike a secured card, you put down no opening deposit.
Banks and credit unions offer these loans to help you build credit and savings, though late payments can hurt your credit.
How Do Payments Build Your Credit?
The lender sends your payment record to the big three credit bureaus as an installment loan, which is a loan you repay in equal monthly amounts over a fixed period.
Late payments get reported as well, so missing one can do damage. The Consumer Financial Protection Bureau (CFPB) found in a study that 39 percent of borrowers paid late at least once.
Payments on payday loans never reach the bureaus. Even perfect on-time payments on those will not build credit.
What a Credit Builder Loan Costs
The CFPB study found that a $600 loan over 12 months ran close to $4 monthly in fees and interest. What you pay varies a lot from one lender to the next, as these examples show.
| Company | Loan size | Payback time | Price |
|---|---|---|---|
| DCU (credit union) | $500–$3,000 | 12–24 months | fixed 5% APR |
| First Harvest Credit Union | $500–$2,500 | 6–24 months | 12.50% APR plus a $35 processing fee |
| Self | $25 to $150 a month | 24 months | Amount returned depends on the plan; see examples below |
APR means the yearly cost of borrowing, written as a rate.
Self's Plans, Up Close
Self places the money in a certificate of deposit held by a bank, which is a savings account locked for a set period, and you pay it down month by month. Self says it does not make a hard credit inquiry.
- Lowest plan: $25 monthly for 24 months; $511 comes back
- Middle example: $35 monthly for 24 months; you pay $840 and receive $717, which works out to a 15.69% APR and $123 in finance charges
- Top plan: $150 monthly for 24 months; $3,069 comes back
Paying Self off early is allowed, though it leaves you with less payment history.
Who Gains the Most?
According to the CFPB, the loan worked best for people carrying no current debt. Among the 1,531 credit union members in its study, people with no current loan had a 24 percent higher chance of ending up with a score after opening one. People with no debt saw their scores rise about 60 points more than people who already had debt.
For people who already owed money, scores on average tended to slip a bit. About 26 million US adults have no credit record at all, so if you're starting from scratch, you're far from alone.
The study also linked the loan to a $253 average increase in savings balances.
Take Jordan, an example of a 22-year-old with no score and no other loans who can spare about $35 a month. On Self's $35 plan, Jordan would pay $840 over 24 months and get $717 back. The $123 difference is the finance charge, and paying it does not guarantee a score increase. A credit union loan at 5% to 12.50% APR could cost less, so it's worth comparing. Because Jordan has no debt, the study suggests Jordan could see the biggest gains, as long as every payment is on time, since late ones are reported too.
Questions People Ask
Will applying hurt my credit or require approval?
Self says it doesn't do a hard credit check, so applying shouldn't leave a hard inquiry on your report. Self doesn't spell out what it takes to be approved, so ask the lender before you apply.
Can a credit builder loan raise my score quickly?
These loans run 6 to 24 months, so they work slowly. It's reasonable to expect your history to build over time, not overnight.
Where can I get a credit builder loan?
You can get them from banks and credit unions. Both DCU and First Harvest begin at $500. In 2024 the National Credit Union Administration also chartered a new federal credit union intending to offer them.