Can Credit-Builder Loans Help Boost Your Credit

People are all too familiar with how using credit wisely and responsibly can help improve their credit scores. That sounds simple enough, but for people who already have low credit scores, it can be quite a conundrum. If you already have low credit, how can you get approved for a traditional credit card or loan, which you will then use to build your credit?

That may seem like an obvious loophole in the credit system, but there’s actually a way around it. As an alternative, a credit-builder loan is a viable option for those who lack much credit history or have negative marks attributed to them.

What Is a Credit-Builder Loan?

A credit-builder loan is a loan program designed to help people who have little to no credit history, to begin with. It works a little differently than a traditional loan program as it does not require good credit for approval. They do, however, require that you earn enough income to make payments.

This type of loan is better suited for first-time loan applicants who are still yet to build their credit history. For those who have existing debt, a credit-builder loan may not be the best choice for you.

This is because it might not make any difference to your credit scores because of the amount of debt you have. According to an analysis conducted by the Consumer Financial Protection Bureau in 2020, people without existing debt saw their credit scores increase by 60 points more than those who have existing debt.

How Does a Credit-Builder Loan Work?

Small financial institutions like credit unions, online lenders, and community banks are known to offer this type of loan. They also go by the names “fresh start loans” or “starting over loans,” depending on the provider.

Unlike a personal loan or other traditional loan programs, credit-builder loans work differently because you don’t actually get the amount you loan. Instead, the money you borrowed is hello in a bank account under the lender’s control. You then make your payments, and you only get the money you borrowed after you have fully repaid the loan.

It might not make sense at first, but it’s basically just asking someone also to save your money for you. The good thing about this is you get to build your savings and your credit at the same time. This also acts as a safety net for the lender since they usually deal with people with low credit scores.

Keeping up with payments on your credit-builder loan is crucial because it basically shows that you are able to handle a credit account. It’s a way for you to prove that you are responsible enough to pay on time despite having no credit history.

What You Need to Watch Out For credit-builder loans

Like any other type of loan, a credit-builder loan does have varying interest rates. So, the amount you get once you’ve fully paid the loan doesn’t exactly total the amount you paid them. You will be charged with interest on your monthly payments. To put it simply, you’re paying someone else to save your own money for you. It’s still a good deal since you’re able to build your credit this way.


Credit-builder loans can be a lifesaver for people who are not sure how to build their non-existent credit. Once you’ve applied for a loan, you can start paying it off until you can get the full amount and complete your payments. It’s an excellent credit-building exercise for first-time loan applicants.

Trying to find a lender you can trust and rely on? Look no further than Calhoun Finance. We are a local company based in Anniston, AL, serving clients with pride. If you ever need to apply for personal loans with affordable payment plans and no hidden fees, feel free to give us a call. Apply for a loan today and get started!

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