What is a credit builder loan?

Let’s break it down:  

1. You pay a set amount spread over a set loan term, typically ranging from six to 12 months.
2. These loan payments go into a secured account held by the lender.
3. The lender reports your payment history to the main credit reference agencies (Equifax, Experian, and TransUnion) so they can update your credit report.
4. The lender releases the funds back to you once you’ve made all the payments. Some providers may allow you to pull out earlier and get your money back, but you’d need to check the terms and conditions. 

It’s like a savings account that builds your credit history. On-time payments help build a positive credit history, while late payments can negatively impact your score. 

Are credit builder loans worth it? 

Whether this type of loan is right for you depends on your individual circumstances. Here are some pros and cons to consider: 

Benefits  

• Easier to get approved - even if you have a low credit score.
• Potentially improve your credit score – always making your payments on time can gradually boost your credit score.
• Encourages financial discipline - these loans can help you develop a habit of putting money aside and managing monthly payments. 

Disadvantages 

• Restricted access – you may have to wait until the loan is paid off to receive the money back.
• Potentially damage your credit score if you miss any loan payments. 
• They often have lower amounts than typical personal loans, ranging from around £100 to £5,000.
• Many credit builder loans come with fees – this could be a one-off fee if you want to transfer your money to an existing bank account, or a monthly membership fee, for example. Make sure you check the terms and conditions before deciding whether to go ahead. 

Tips to reduce these risks: Choose a reputable lender, ensure you can afford the monthly payments, and set up automatic payments to avoid missing due dates. 

How fast can a credit builder loan improve my credit score? 

A credit builder loan could start improving your credit score within around three to six months. The exact timescale will vary from person to person, depending on your starting credit score and past financial behaviour. 

What are the alternatives? 

There are other options available to explore, whether you’re looking to borrow money or build your credit score. Think about what suits your individual needs and circumstances best. 

Bad credit loan 

While we don’t offer credit builder loans, we do offer bad credit loans. As the name suggests, a bad credit loan is a type of borrowing designed for people with a poor credit score.  

It works like most other loans where you borrow a sum of money and repay it in fixed monthly instalments, including interest. If you always pay on time, then your credit score should gradually start to improve.  

It’s generally easier to get approved for a bad credit loan than a traditional loan, but higher interest rates may apply due to the risk the lender is taking.   

With this type of loan, a guarantor signs the loan agreement to promise that they will cover any missed payments if the borrower falls behind. This reduces the lender’s risk, making it easier for individuals with poor or no credit history to get approved.   

Budgeting Loan 

A Budgeting Loan is a small interest-free loan provided by the UK government to help people on certain benefits cover essential or unexpected expenses. This includes (but is not limited to) things like clothes, shoes and rent.  

You can check the government’s website to see if you are eligible and how much you could receive. 

Other ways to improve your credit score  

There are other things you can do to boost your credit score that could be worth considering, including: 

• Register to vote – lenders check the electoral register to confirm your identity.
• Regularly check your credit report for errors - if you spot any mistakes, dispute them as soon as possible, to ensure your credit report accurately reflects your financial behaviour.
• Manage existing credit - if you have existing credit cards or store cards, try to keep your credit utilisation ratio (the amount you’re using out of your total credit limit) below 30%. This shows lenders that you’re not overly reliant on credit.
• Always pay your bills on time to show that you can manage money well.