Credit glossary
Credit builder loan
A small loan whose money is held in a locked account while you make monthly payments, with the funds released to you as you repay.
The lender reports your payments as an installment loan, which is the whole point: a year or so of on-time history without carrying a card balance. In the program the CFPB evaluated, a $600 loan cost about $54 a month for 12 months, roughly $48 in interest over the year, and $50 from each payment moved into the borrower's own savings account.
The CFPB study found the biggest gains went to people with no existing loans, while people already carrying debt saw small score declines, partly from trouble keeping up with payments. That makes a builder loan a tool for a thin file rather than a fix for a crowded one. Confirm the lender reports to all three bureaus before you sign, and put the payment on autopay.
Guides that go deeper
- Credit builder loans: how they work and who they actually helpA credit builder loan holds the money until you've paid it off. What gets reported, what it costs, and what a CFPB study found about who benefits.
- How to build credit from nothing, with a month-by-month planNo credit history at all? How a credit file starts, which first account makes sense, when a score appears, and a 12-month plan with the math shown.
Sources
- Targeting credit builder loans: Insights from a credit builder loan evaluation (July 2020), Consumer Financial Protection Bureau
- CFPB study shows financial product could help consumers build credit, Consumer Financial Protection Bureau
- Building credit from scratch (checklist), Consumer Financial Protection Bureau
This is education, not legal or financial advice. Spot an error? Tell us and we'll fix it.