Credit Builder Loans Online: The Complete Guide to Building Your Credit From Scratch

Have little or no credit history? Credit builder loans allow you to build credit from the ground up. With these loans you make small monthly payments that are reported to the credit bureaus. Over time, this helps establish a positive payment record so you can qualify for other loans and credit cards down the road.

In this comprehensive guide we’ll explain what credit builder loans are who they’re for, and how you can get one online to start building credit today.

What is a Credit Builder Loan?

A credit builder loan is an installment loan designed specifically to help consumers with no credit or poor credit establish a positive credit history Here’s how it works

• You borrow a small amount, usually between $300 and $1,000. The loan funds are held in a savings account.

• You make fixed monthly payments on the loan for a set period, normally 12-24 months.

• The lender reports your on-time payments to the three major credit bureaus – Experian, Equifax, and TransUnion.

• After you pay off the loan, you get access to the funds that were set aside in the savings account.

Essentially, credit builder loans allow you to “build credit” by demonstrating responsible usage and repayment of a loan. With an established payment history, you become eligible for mainstream credit products in the future.

Who Are Credit Builder Loans For?

Credit builder loans are designed for two main types of borrowers:

Those with no credit history: If you’re an adult just starting to establish credit, a credit builder loan can help kickstart your credit profile. Making monthly payments builds a positive history.

Those with poor credit scores: If you have a low credit score due to past mistakes, a credit builder loan shows you’re committed to improving your creditworthiness. On-time payments help increase your scores.

Specifically, credit builder loans are a good option if:

• You’ve been denied for other loans or credit cards
• You have no FICO credit scores due to lack of credit history
• You have poor credit scores below 600

5 Benefits of Credit Builder Loans

Why might you choose a credit builder loan versus another option to build credit? Here are some key benefits:

1. Requires little or no credit check

Because they’re designed for borrowers with limited credit histories, credit builder loans either don’t require a credit check or do a “soft” credit check that doesn’t negatively impact your scores.

2. Access to funds is limited until repayment

With the loan funds being held separately, there’s little risk of overspending. Your payment obligations are fixed.

3. Builds credit history from scratch

Starting with no loans or credit cards, a credit builder loan establishes your first positive payment history with the bureaus.

4. Repair bad credit scores

Making monthly payments can improve your credit scores that were damaged by past payment problems or excessive debts.

5. Low costs

Credit builder loans typically have lower interest rates and fees compared to alternatives like payday loans or secured credit cards.

How Do Credit Builder Loans Improve Your Credit?

When you make monthly payments on a credit builder loan, it’s reported by the lender to Equifax, Experian, and TransUnion. This builds your credit history, which makes up 35% of FICO credit scores.

Specifically, responsible usage of a credit builder loan helps improve your scores in two key areas:

• Payment history – Making consistent monthly payments on time builds this crucial credit factor, which represents 35% of your FICO score.

• Credit mix – Having an installment loan like a credit builder loan adds diversity to your credit profiles, improving your “mix of credit.” This represents 10% of your FICO score.

Keep in mind credit building takes time. Paying a 12-month credit builder loan on-time can increase your credit scores, but you’ll likely need to graduate to other loans or credit cards to continue seeing significant gains. Be patient and focus on maintaining positive payment habits.

What Credit Score is Needed for a Credit Builder Loan?

The credit requirements for credit builder loans are minimal, since they’re designed for borrowers with limited credit histories. Often, no minimum credit score is specified.

However, each lender sets their own eligibility criteria. Here are some examples:

• No FICO score required
• Minimum 300 FICO score
• 550+ FICO score
• 600+ FICO score

Even with a very low credit score, you may qualify for a credit builder loan. The lender will likely do a soft credit check to confirm your identity and review factors like your income and debts.

Always compare options, as credit builder loan requirements can vary. Focus on lenders willing to work with limited credit borrowers.

Where Can I Get a Credit Builder Loan Online?

You can apply for a credit builder loan from an online lender, credit union, or even some banks. Here are a few places to consider:

Online lenders like Self, Credit Strong, and Grow Credit offer credit builder loans nationwide with online applications, often with same-day approval decisions.

Credit unions like Alliant, Navy Federal, and Pentagon Federal have credit builder loan programs for members. You can join the credit union and apply online.

Some banks like Wells Fargo and U.S. Bank also offer secured personal loans to build credit. You’ll need to visit a branch and have an existing checking account.

I’d recommend comparing quotes from a few online lenders, credit unions, and banks when shopping for the best credit builder loan option. Look for low APRs and affordable monthly payments that fit your budget.

Credit Builder Loan Requirements: What Do You Need to Qualify?

While credit requirements are minimal, most lenders do have some basic eligibility criteria for credit builder loans beyond your credit scores. Here are some common requirements:

• Income – Most lenders require regular income from a job, self-employment, or other sources like social security. This ensures you can make the monthly payments.

• Identity verification – You’ll need to provide your SSN, date of birth, and address so the lender can verify your identity.

• Debt-to-income ratio – Some lenders limit your total monthly debts compared to your income. Typically, debt-to-income ratios up to 50% are allowed.

• Minimum/maximum loan amount – Loan size may be restricted, often from $300 up to $5,000 for credit builder loans.

• US citizenship – You’ll likely need to be a U.S. citizen or permanent resident to qualify.

As long as you meet the basic eligibility criteria, have legal residency, and have income to afford payments, approval is a possibility even with bad credit or no scores.

What is a Good Credit Builder Loan Interest Rate?

Credit builder loan rates vary by lender, but averages around 6% – 28% APR for borrowers with limited credit histories. Here are some ranges you can expect:

• Banks: 8% – 15% APR
• Credit unions: 6% – 18% APR
• Online lenders: 15% – 28% APR

Rates are driven by factors like your creditworthiness, income, and amount you borrow. Online lenders often charge higher rates but offer faster approvals. Banks and credit unions have lower rates but stricter eligibility requirements.

Ideally, look for credit builder loan rates below 15% APR. Compare options to find the lender offering the lowest rate for your situation. Ask if they offer rate discounts for signing up for auto-pay or repayment terms under 12 months.

Do Credit Builder Loans Hurt Your Credit?

As long as you make your payments on time, a credit builder loan can only help your credit, not hurt it. Each on-time payment builds positive history with the credit bureaus.

However, if you continually make late payments or default on the loan, your credit scores could be damaged due to:

• Increased late payments showing on your credit reports
• Higher credit utilization since the loan balance remains unpaid
• Potential collections reporting if the lender charges off the delinquent account

To ensure your credit builder loan helps (not hurts) your credit, carefully review the repayment terms when borrowing and setup autopay through your bank to make sure you never miss payments. Having the discipline to pay on-time is key to success.

Alternatives for Building Credit from No Credit

While one of the most effective tools, credit builder loans aren’t your only option for building credit from scratch. Some other routes to consider include:

• Secured credit cards – These require a cash deposit that becomes your credit limit. You still have to make monthly payments.

• Become an authorized user – Ask a family member with good credit to add you as a user on a current credit card.

• Credit-building services – Companies like Experian Boost and Self can use utility payments or rent to build your credit file.

• Retail store cards – Department store cards from places like Kohl’s and Macy’s are easier to qualify