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Using a Credit Builder Loan to Get Good Credit » The Ultimate Guide to Loans » Using a Credit Builder Loan to Get Good Credit



Nearly a third of Americans have a credit score lower than 601. If you have bad credit or no credit, you probably feel like you’re stuck in a Catch-22. Traditional lenders won’t work with you because of your bad or nonexistent score. But you need loans and credit cards to improve your score. Luckily, some products can help you escape this trap. A credit builder loan is designed to help people who have no credit, little credit, or “colorful” credit. The loans help people build or rebuild their credit scores.

What is a credit builder loan?

Credit unions, community banks, and some online apps/services offer credit builder loans. Consumers can also go to a Community Development Financial Institution (CDFI). All credit builder accounts require an initial deposit (the “loan”) that the person will make payments toward.

Credit building loans are installment credit, which means you borrow a set amount that you pay back with fixed payments. Unlike traditional personal loans, you don’t receive the money upfront. Instead, it’s held in an account until you pay the loan off.

Interest rates are usually between nine and 16 percent but can fall outside of this range. Once the borrower finishes making payments, they get the original deposit back. Some services even give back part of the interest payments as a reward for on-time payments.

Once you make all the payments, you receive the money you borrowed, minus fees. The lender reports the payments for the loan to the credit bureaus. As long as you make all the payments on time, this helps you build a positive payment history. Thus, you improve your credit score – hence the name.

Why go through the process? Once your score has improved, you’re more likely to get better interest rates on loans and save a lot of money.

Earning something back with a credit-builder CD

With some builder loans like Self, you earn money on the amount you borrow. Self uses the funds you borrow to open an FDIC-insured Certificate of Deposit (CD) with one of their banking partners. The CD earns interest over time as you pay the loan back.

Once you finish making payments, the CD matures and unlocks. You receive the principal back plus the growth from the CD. Of course, the loan itself has some costs – a $15 administrative fee, plus interest charges. So, don’t expect to see the savings and growth that you would see with a normal CD. Instead, the growth of the CD offsets a portion of the interest charges on the loan.

When to get a credit builder loan

Considering that it could help or hurt your credit, how do you know if it’s right for you?

A credit builder loan is something to consider if you:

  • Don’t have a credit history yet.
  • Are not carrying any other debt.
  • Have no debts reported to the credit bureaus.
  • Can afford to make the monthly payment.
  • Commit to pay the loan on time every month for the life of the loan.

Now, if you have debt reported to the credit bureaus, your budget is tight, and you are late on payments, you probably want to pass.

“Borrowers with existing loan obligations were more likely to struggle to incorporate the credit builder loan into their payment obligations, for example by making a late payment on a non-credit builder loan, ” the CFPB said. The CFPB also found that four out of ten people who took out a credit builder loan missed payments, which hurt their credit more than helped it.

Surprisingly, about 45 percent of those who didn’t carry any other debt wound up missing at least one payment on their credit builder loan. You can read more about the survey outcomes here.

Another caveat is if you have a history of bouncing checks, you might not get past the initial ChexSystems bank screening at all. So, if you are thinking about getting a credit builder loan to improve your credit score, you’ll need to evaluate if it is really the right move for you.

In the end, paying current obligations on time should still be your main priority.

How Self’s credit builder account works

  1. Download the Self app for free from the App Store or Google Play Store.
  2. Create an account or sign up through Facebook; you can also do this online.
    1. First, you’ll enter your name and email, as well as mailing address
    2. Then it will ask for your Social Security number and birthdate to verify your identity.
  3. Choose the loan amount based on the monthly payment you can afford
    1. Options are $25, $35, $48, and $150
    2. If you choose a $25 or $35 payment, the term will be 24 months; if you choose $48 or $150, then the term is just 12 months
  4. Read through the explanation of fees and finance charges.
    1. Self has a nonrefundable administrative fee that ranges from $5-$15, depending on the loan amount and when you sign up.
    2. APR on the loan ranges from 14-16% APR.
    3. Make sure to note how much money you will receive back versus the total amount of payments.
  5. Apply for the loan, consent to the electronic disclosure, and confirm if you’re active-duty military.
  6. Review your application
    1. Now they will tell you the APY (annual percentage yield) of the CD, which should be around 0.10%.
    2. It will also let the date that the CD will mature and unlock – i.e. when you can access your funds.
    3. Confirm you are a U.S. citizen or permanent resident.
    4. Agree to the terms and conditions
  7. Link your bank account or debit card
    1. If you’re using your bank account, you’ll need the routing and account number.
    2. If you’re linking your debit card, you’ll need the card number, expiration, and security code.
  8. Decide if you want to set up Autopay (recommended) and Accept the Loan.

Using other features from your Self dashboard

Once you’ve accepted the loan, Self will take you to your dashboard. This will show you:

  • Your savings progress, which starts at $0.00
  • The date of your next payment
  • Confirmation of Autopay enrollment

You can also set up the dashboard to show you your credit score. Simply answer a few security questions to reconfirm your identity. Then Self will show you your Experian VantageScore 3.0 automatically anytime you log in.

What happens once you complete the payments?

At the end of the payment schedule, you will receive an email notification that your CD has matured. After 10-14 business days, Self will send you a check. That’s currently the only option available in their system.

How these loans help you build credit

Credit-building lenders report to all three major credit bureaus in the U.S. (Experian, Equifax, and TransUnion). This means every on-time payment that you make helps you build a positive payment history using this loan.

Since payment history accounts for 35% of your credit score calculation, this can be a big help. If you have no credit, you’ll start racking up the positive payment history to show you have experience with credit.

Repayment periods are typically six to 24 months, which should give someone a chance to have a “good credit” signal reported to the credit bureaus. The good news: According to the CFPB, People who did not have any debt who used this type of loan saw their credit scores go up by 60 points.

Not such great news: Consumers who were already in debt found that their credit scores decreased by about three points.

Even if you have bad credit, this new positive history will help offset negative items you may have, such as missed payments on other accounts. The “weight” of negative information on your score decreases over time. So, positive actions now will outweigh past mistakes.

A credit-building loan will also help improve the number and types of accounts that you have. These are minor factors used in calculating your score, but they can still give you a little boost. Having a mix of loans and credit cards shows you know how to manage a diverse range of accounts at the same time.

Does a credit builder loan negatively affect your credit in any way?

At least for Self, setting up this account will not negatively affect your score, if you make all the payments on time. Creating an account with Self does not create a hard inquiry on your credit report. That means you won’t lose a few points off your score for approving a credit check.

Self also doesn’t hurt your credit utilization ratio. Since you don’t receive the funds from the loan upfront, you don’t increase the total debt load you carry. And unlike a secured credit card, there’s no balance that you can run up, which can drive your ratio up.

The only way a credit builder loan will hurt your score is if you miss a payment by more than 30 days. Any loan or credit card payment that’s more than 30 days late creates a negative item in the payment history of that account. Just like traditional lending products, credit builder loans will hurt your credit if you can’t keep up with the payments.

Other places you can get a credit builder loan

Self isn’t the only place you can get one of these loans, although we think it’s one of the easiest. Credit unions and small community banks usually offer them as well. If you go through a credit union, you may need to meet certain requirements to become a member. Community banks don’t have those limitations

You can also look for a Community Development Financial Institution (CDFI). These are banks and credit unions that specifically focus on serving people who get turned down by traditional institutions. If you’re “unbanked” or “underbanked” and don’t even have a checking account, a CDFI may be willing to help you. Nerdwallet has a handy list of CDFIs by state.

One last option is to find a funding circle in your local community, also known as a lending circle. A group of adults in your community each contributes a set amount of money each month. Each month, one of the members of the circle gets the money from everyone else.

For example, if there are 11 people in your circle, you donate $100 for 10 months. Then one month, you receive $1,000 from the other 10 people. You can find local lending circles and set them up through

If you’re getting a loan through one of these sources, follow these tips:

Make sure that the lender reports to all three credit bureaus

Not all lenders report to every bureau. Some credit unions and smaller banks often only report to one or two. That will only help you build credit through those bureaus. So, you want to make sure the lender reports to all three, so you get the full benefit of building.

It’s worth noting that any lending circle set up through Mission Asset Fund will report to all three bureaus. However, not all lending circles are officially registered. Make sure yours is before you commit to joining the circle.

Check APR, APY, and fees

You need to know exactly how much the loan will cost and what you will get back once you make all the payments. This means you need to know:

  • What fees will apply when you take out the loan
  • The annual percentage rate (APR) applied to the loan
  • Total finance charges

If you get a Certificate of Deposit (CD) when you take out the loan, you also need to know the annual percentage yield (APY). That’s the amount of interest you earn on the CD. This will offset the cost of the loan, meaning you get more money back at the end.

Understand the terms and monthly payments

If you receive your loan through a financial institution, then you will receive a Truth in Lending disclosure. This will detail the number of payments and the monthly payment amount. It will also show you the date you will complete the payments and expect to receive your funds.

If you go through a lending circle, make sure you understand:

  • the monthly payment amount
  • number of rounds/people participating
  • when it will be your turn to receive the funds

Check with financial institutions about hard inquiries

Using Self or MAF lending circles will not create any hard inquiries on your credit report. However, if you’re going through a credit union, bank or CDFI make sure to check if they require you to authorize a credit check. If they do, this will create a hard inquiry on your credit report.

Smart uses for builder loans

One of the really positive things that these loans can do is essentially force you to save up for big events and purchases. You take out the loan strategically to match the term to when you would want the funds. Then you make payments until that time and receive the money. Just make sure to account for the distribution of funds, which could take up to 2 weeks if the lender sends you a check.

NOTE: Most institutions, including Self, won’t let you have more than one builder loan open with their institution at once.

Use a 12-month loan to save for the holidays

Open a loan with a 12-month in October or November. Make payments for 12 months. Receive your funds the following year and use them to pay for gifts, decorations, and even travel. Avoid using credit cards to cover any expenses in your holiday budget. Repeat for next year.

Set up a 12-month loan to save for your annual summer vacation

Open the loan at the start of summer and make payments for 12 months. Receive your cash next summer and use the funds to pay off reservations from your travel rewards credit card. This will allow you to earn miles and immediately pay off the balance. That way, you don’t offset miles earned with high APR interest charges from your credit card.

Generate funds for a down payment on your next car

Decide when you want to buy your next vehicle. Open a 12-month or 24-month builder loan accordingly. Make payments to generate funds for your down payment. Receive the funds and head to the dealership.

Force yourself to start saving

Many savings products that offer better growth than a standard savings account require a minimum deposit. Use the builder loan to generate funds to open a savings product, such as a regular Certificate of Deposit (CD) or Money Market Account (MMA).

The amount required is usually $500 or $1,000, so it’s perfect for the funds you’ll receive. This may be easier than trying to save up $1,000 in your main savings account since many people end up dipping into that easily accessible cash.

Pay for your next device with cash

If your iPhone or Samsung Galaxy is only going to make it for another one to two years, use a builder loan to save up for a replacement. The monthly payment plans that mobile providers offer aren’t usually worth the added costs and interest charges. This will let you buy the latest phone for free and clear. Same with a laptop or tablet.

Fund a renovation project

If you have it in mind that you want to upgrade your home, but don’t have the cash, use a builder loan. Make payments towards your dream project for 1-2 years, then receive your cash to do the upgrades that you want. This will help you avoid high-interest-rate credit cards.

How Much Could You Save?

Just tell us how much you owe, in total, and we’ll estimate your new consolidated monthly payment.