What Is A Credit Builder?

When something has “credit builder” in the name, it's a hint that the data from your interaction with that product will be reported to the credit bureaus. It's designed to help you increase your credit score, whether you're building credit for the first time or building back from a low score. This can come in the form of credit builder loans, credit builder accounts, or credit builder credit cards.

Credit builder loans tend to pop up first when you search the term “credit builder”. Don't let the word “loan” fool you here though: if you get a credit builder loan, you're going to be giving money to it instead of the other way around. The amount you're “borrowing” is held in a bank account (also called a credit builder account) while you make payments until you reach the full amount. It works this way because the lender considers you a risk as long as you have no credit or bad credit, and your payments are going to be the eventual proof that you can be trusted. Before that happens, they'll be holding all the cards...well, all the money, at least.

That's not the only potential drawback to credit builder loans. There's a possibility that the lender's going to charge interest, which means you'll be paying extra money to them for the privilege of having your loan payments reported. There might also be fees involved, which is the same deal: more money for the same outcome. And for the entire life of the loan, you're going to be on the hook for making regular payments to the lender. If you miss any of those by more than 30 days, the loan will start hurting your credit instead of helping it.

Because of these downsides, I prefer credit cards for building credit. There's no interest if you pay the full balance every month, and since that balance will be limited to the amount you choose to spend on the card, you can control it and keep it affordable even if your disposable income amount changes. You'll simply be able to hold onto more of your money. You can take that amount you would have been paying into the loan account and put it in a high-yield savings account, where it'll earn more money for you just by sitting there. You could also invest it during that time and have it earn dividends for you, if that's your jam. Or, most importantly, if you need that money to pay your bills, it'll be there for you instead of sitting in the lender's account.

If you want to get a card to get all these perks, it shouldn't be too hard. Credit builder cards are the easiest for people with low scores to qualify and get approved for, since people with low scores are their target customer. In fact, some credit builder cards don't do a credit check at all! There are some that ask for your bank details so they can assess you based on your bank activity instead of your credit score. Others may skip both of these steps and ask you to put up some of your own money as collateral instead. These are called secured credit cards, and they use money you've deposited to act as your credit limit. This deposit is the only payment that isn't used by you directly to buy a good or service and it only gets paid once, unlike credit builder loans, which charge a payment every month for a loan that you aren't able to use yet. Once you've built enough credit to graduate to a non-secured card, assuming you haven't fallen behind on your payments, this deposit will be returned to you.

After you start using a credit builder card responsibly by making all your payments on time, the lender that issued your card will report this positive information to the credit bureaus, where it will start to have an impact on your score. To help you get started, I've put together a list of currently available credit builder cards and relevant details of each one. You can click here to get the list!