The 5 best credit builder loans of 2022

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Installment loans add to your credit mix, which can improve your credit score, but they're difficult and expensive to take out without good credit. To address this, some lenders offer credit builder loans, which require borrowers to pay off their loans before they get the money. These loans pose little risk to lenders, so borrowers with bad or no credit can qualify.

Whether you want to add an installment loan on your credit report or you're looking to build credit from scratch, credit builder loans are a great option if you want to see your credit score rise.

Most widely available loan: Self

Highest loan amount: Credit Strong

Best no-frills loan: Mission Lane Credit Builder Account

Lowest APR: Digital Credit Union

Most additional perks: MoneyLion

Compare the best credit builder loans

Most widely-available loan: Self

Better Business Bureau rating: B

Rate: Self Credit Builder Account

Why it stands out: Self Credit Builder Account is one of the more established credit builder loan providers and one of the few providers that operate in all 50 states. It has four plans available from small to extra large that range from $25 per month to $150 per month.

One of Self's biggest benefits is its Self Visa® Credit Card, which borrowers can qualify for after three months of on-time payments and $100 deposited. The Visa credit card is secured by the money you have already deposited on your credit builder loan.

This card may not come with the lowest APR compared to other cards — it bounces around Self Visa® Credit Card, but it's another credit-building tool that is available to you as Self customer. Keep in mind that your credit limit on this card will not be terribly high since it's based on the money you've already deposited. You will want to be careful how you use it so you don't upset your credit utilization ratio, which will hurt your credit score and defeat the purpose of taking this loan out in the first place.

Highest loan amount: Credit Strong

Better Business Bureau rating: B

Rate: Credit Strong Build and Save Installment Loan

Why it stands out: Credit Strong Build and Save Installment Loan offers the most options out of any of the credit builder loan products out there with availability in 48 states (not available in Vermont or Wisconsin). In total, there are seven plans divided into three categories: Build, Build and Save, and Magnum. 

The Build category focuses on the customer making the lowest possible monthly payments, which go as low as $15 per month over 120 months. On the other end of the spectrum, there's Magnum, which focuses on large loan amounts. You can take out a $5,000 installment loan or a $10,000 installment loan and pay it back over a payment period that can go up to 120 months. 

The Credit Strong Build and Save Installment Loan is the middle ground with three plans within this category, and it's the one we recommend. One plan has you pay $38 over 36 months, of which you receive $1,100 back in savings. The two other plans have 24-month payment periods with $48 or $96 monthly payments totaling $1,000 and $2,000 in savings after interest is charged. These plans have the highest APRs of all the plans that Credit Strong provides, but with a shorter payment term, you'll end up paying less money than you would with the other plans. 

Best no-frills loan: Mission Lane Credit Builder Account

Better Business Bureau rating: A+

Rate: Mission Lane Credit Builder Account

Why it stands out: The Mission Lane Credit Builder Account is significantly cheaper than the other credit builder loans on the market and fairly straightforward. Its credit builder loan has you paying $25 per month over 12 months. When you finish those payments, you get back the $300. There are no other plans, no bells and whistles, and no interest rate.

That said, the credit-building potential of this loan is limited compared to some of the other loans on this list because that limit is lower. For one, your payment period is shorter and the installment loan recorded on your credit report isn't terribly high. Mission Lane is also available in just 19 states.

Lowest APR: Digital Credit Union

Better Business Bureau rating: A+

Rate: Digital Credit Union Credit Builder Loan

What stands out: Digital Credit Union Credit Builder Loan offers a good amount of flexibility with its credit builder loans, with loan amounts ranging from $500 to $3,000 over 12 to 24 months. The APR for these credit builder loans is at 5%, though DCU notes that can change at any time. Your money will also earn dividends in the savings account DCU puts your money in.

The biggest downside to DCU's credit builder loan is its exclusivity. You have to be a member of Digital Credit Union to qualify for this loan, and membership is quite limited. DCU is available to a handful of organizations and communities around New England. It also partners with over 800 workplaces to give employees DCU memberships. You can find the full list of DCU membership qualifications here.

That said, you can access a DCU membership by joining one of the affiliated organizations listed on DCU's website since they aren't region-specific. Most of these organizations just require a membership fee. You hold a DCU membership for life, so even when your membership at one of the listed organizations expires, you'll still be a DCU member. Your family will also be eligible for memberships.

Most additional perks: MoneyLion

Better Business Bureau rating: D

Rate: MoneyLion Credit Builder Plus Loan and $19.99 monthly fee

Why it stands out: MoneyLion Credit Builder Plus Loan offers one plan, a $1,000 credit builder loan that you pay off in 12 months. Calculating the APR can be tricky. MoneyLion offers rates as low as 5.99%, though they can also be as high as 29.99% based on the information you provide in your application, primarily information from your primary checking account. 

The biggest drawback to MoneyLion's loan is that to access the credit builder loan, you have to pay a monthly $19.99 membership fee. While these costs add up throughout your loan, your membership gets you services in addition to the credit builder loan. It comes with an investment account, deposit account, and credit monitoring services with TransUnion.

Other loans we considered that didn't make the cut

We considered quite a few loans for this list. The following products offer pretty good rates, but they're a little too niche to be called the "best credit builder loans."

Republic Bank: We considered this provider because of its multiple payment plans and decent rates. The reason it didn't make the cut is accessibility. Republic Bank's loan is only available in five states: Florida, Indiana, Kentucky, Ohio, and Tennessee. 

Metro Credit Union: Metro Credit Union offers lower rates than DCU at 4.1%. Its credit builder loan can go as high as $3,000 with payment plans as long as 24 months. Unfortunately, Metro Credit Union is even more exclusive than DCU because it doesn't have that affiliated organization workaround. MCU will also pull a hard inquiry on your credit if you apply. 

One takeaway from these honorable mentions is that many local banks provide pretty decent rates compared to the lenders who offer credit builder loans nationwide. If you don't see a credit builder loan that checks off your boxes, check with your local credit unions or banks to see if they offer what you need.

What is a credit builder loan?

When you take out a credit builder loan, the creditor sets aside the money you "borrow" in a savings account. As you pay off your loan, the creditor reports your payments to the three main credit bureaus, so you build up payment history. Once you reach a certain number of payments or pay the loan off entirely, the creditor some or all of the money to you.

Because of the way credit builder loans work, they are often marketed as savings accounts, since you are putting money away in increments that you'll receive later. That said, many of these credit builder loans charge interest, so you'll be getting back less than you put in. If you're looking for a savings account, there are better places to look.

Not only does this add an installment loan onto your credit reports, but it also builds up payment history, another major factor in your credit score. Since the creditor keeps the money until it's paid off, it's not at a huge risk of losing money. This means it can approve people with low credit scores or no credit at all. Credit builder loans also generally charge a lower APR than traditional loans.

Who offers credit builder loans?

You can find credit builder loans from a variety of financial institutions, though the larger banks like Bank of America or American Express usually don't offer a credit builder loan, though they offer secured credit cards, another credit-building product. Here are some places you may find a credit builder loan:

• Credit unions
• Local banks
• Online lenders

Methodology 

The most important factors that determined which credit builder loans were the "best" were availability, flexibility, and affordability (the -bility trinity, if you will). Credit builder loans with more state availability did better than regional loans, even if the regional loans had lower APRs.

Flexibility looks at the types of plans that the lender offers including limits, monthly payments, and payment periods. It also takes into account the borrower's ability to pay off their loans early or cancel their account before their loan is fully paid off. All these loans let their borrowers pay their loans early without penalty. Additionally, all accounts, except for MoneyLion, will not penalize you for canceling your account before your total amount is settled. 

The third factor is affordability, which comes down to how much money you're spending to build credit. This can be factored into interest paid, origination fees, or any additional costs such as MoneyLion's monthly membership fee. 

Some of these services did have perks such as Self's secured credit card or MoneyLion's credit monitoring. While we folded these into our considerations, they aren't nearly as important as the core product. Those perks can be found elsewhere at a better price point. 

Credit builder loans are a great tool to build credit; however, it's important to note that these should be a means to an end. Your loan provider might offer you additional perks so you stick around, but once you've built your credit to a certain level, there are better, cheaper ways to continue building credit. If you're not sure that you can keep up with the monthly payments, it might be smart to find another way to build credit because missing those payments will set you further back than where you started. 

Credit builder loan frequently asked questions (FAQ)

Are there alternatives to a credit builder loan?

Becoming an authorized user on a friend or family member's credit card is one way to build credit. As an authorized user, you get a credit card in your name. When you use the card, the primary cardholder is responsible for settling your charges.

If this isn't an option, you can apply for a secured credit card instead. Providers of these cards will have you make a security deposit when you open the card. You will be borrowing from this money, so the amount you deposit will become your credit limit. The security deposit also acts as collateral for the lender in case you default on your payments. Because the lender is letting you borrow from money that you already gave them, you pose very little risk to them so they can accept applicants with bad credit or no credit at all.

Can I pay off credit builder loans early?

Yes, you can generally make payments on your loan that exceed your normal monthly payment. In doing so, you pay your loan off quicker and reduce the interest you pay. On a traditional loan, this would be ideal. However, because the goal of this loan is to build credit, it's more advantageous to make the scheduled payments so you get the full benefit that the payment history grants. 

If you need to make payment early, you can. Some lenders will charge a penalty fee to do so. None of the loans in the "best of" list will charge you for paying off your loans early. 

How is credit score calculated?

Your credit score is calculated based on information on your credit reports, assembled by the three major credit bureaus: Experian, Equifax, and TransUnion. How that information is crunched into your credit score depends on which credit scoring model you look at: usually VantageScore or FICO. 

Here's how FICO calculates scores:

• your payment history (35%)
• Credit balances (30%)
• Length of credit history (15%)
• New credit (10%)
• Mix of credit accounts (10%)

Here's how VantageScore calculates their scores:

• Your payment history (40%)
• Length and types of credit (21%)
• Credit utilization (20%)
• Credit balances (11%)
• Recent credit applications (5%)
• Available credit (3%)