What is a credit builder?

What does a credit builder actually do?

Credit-building products are designed to add information to your credit reports that may help you build credit history over time. Depending on the product, they may help by:

• Reporting on-time payments
• Reporting a credit limit along with your balance, which together can affect the share of your available revolving credit you're using (your credit utilization)⁴
• Adding another type of credit account

Here's the part people miss: a new account can move your score the wrong way at first even when you pay on time.^7,8 Which tool helps depends on what's already in your credit reports.

What kinds of credit builders are there?

Here are four common kinds of credit-building products. They don't all build credit the same way.

A credit-builder loan

The classic version. With a traditional installment loan, you get the money upfront. A credit-builder loan flips the order: the lender holds the funds while you make payments, then releases them under the loan terms, minus any interest or fees.¹

That can make a credit-builder loan an option when a traditional loan is out of reach: the lender holds the funds while you pay. You still need room in your budget for each payment.

Some lenders release the funds a little at a time; others wait until the end. Either way, you're paying toward money you can't use yet. Check the interest and fees, if any, and when you'll actually get the money.

A secured credit card

Banks love this one: your deposit gives them a safety net. Put down $200 and you may get a card with a $200 limit. You can use the card for purchases, and the issuer may report the limit, balance, and your payment history.³

It's revolving credit, so unlike an installment loan, a reported limit and balance can affect utilization.⁴ The issuer generally returns your deposit after a stretch of on-time payments, often when it moves you to a regular unsecured card, or when you close the card with nothing owed.³

A line-of-credit credit builder

Solid Credit's Credit Builder operates similarly to a store card, where it can be used to purchase a Solid Credit subscription. Its bank partner opens a line in your name, but the line can only cover your Solid subscription, not other purchases or cash withdrawals. You repay the subscription charge each month. There is no security deposit or lump sum at the end. The line's credit limit is reported to the credit bureaus, but only your subscription can be charged to it, so most of that limit will never be used.

You also get the rest of Solid Credit with your subscription. We're biased, but we think that's good value; you should decide whether the monthly price fits your budget. You can cancel at any time.

A secured spending card with no preset limit

Some newer secured cards work more like a spending account. You add money as you go, and those funds back what you can spend with the card. You may not need a large fixed deposit upfront. Some providers report your payment history without reporting a preset credit limit, so the card may not lower your utilization. Check exactly what the issuer reports before you open one.

Other ways to add payment history: Rent and bill reporting services may send payments you already make to one or more credit bureaus. They do not open a credit account, and the effect depends on where the payments appear and which scoring model is used.

Another option is becoming an authorized user on someone else's credit card. The account may appear on your credit reports and affect some scores, but it is not an account in your own name. Its effect depends on the account and scoring model; recent FICO versions give authorized-user accounts less weight than primary accounts.⁵

Where does Solid Credit's Credit Builder fit?

Solid Credit's Credit Builder is a restricted-use line of credit. Our bank partner opens the line in your name, and it can only cover your Solid Credit subscription—not purchases or cash withdrawals. You repay that charge each month, and both your payment history and the line's credit limit are reported to Equifax and Experian. Payment history is the biggest factor in most credit scores,^7,8 and a reported limit with a low balance can also affect your credit utilization.⁴

What happens, step by step

• You apply in the Solid Credit app. Checking whether you qualify is a soft inquiry and won't affect your credit score. Our bank partner reviews the application and makes the decision.
• If approved, the line is opened. Check the final agreement for the timing and account terms.
• Each month, your subscription is charged to the line. Nothing else can be charged to it.
• You pay the balance in full each month. You can set up automatic payment to help avoid missing a due date, but you should still check that each payment goes through.
• Your payment history is reported to the credit bureaus every month.
• You can cancel your Solid subscription at any time under the subscription terms. If you cancel, the credit line will be closed, and you still owe any balance on it.

Why we built ours this way

A deposit can be a hard way to start

If you don't have a few hundred dollars to set aside, a traditional secured card may be hard to start with. Our line asks for no security deposit. A credit-builder loan generally asks for no upfront deposit either, but its payments begin before you receive the funds.

A credit limit can do something an installment loan can't

Our line reports a credit limit, and the only balance on it is your subscription, repaid in full each month, so this account shows low utilization on its own. Your overall utilization, the share of your available revolving credit you're using, is figured across all your cards and lines, so what this account does to it depends on your other balances and limits. A credit-builder loan doesn't count toward utilization at all, because utilization counts revolving accounts, not installment loans.⁴ A traditional secured card does, but only after you put down a deposit.

What we gave up

Two reasons another option may fit better:

• A credit-builder loan adds installment history;² Solid's line adds revolving history. If you have only revolving accounts, a loan may diversify your credit mix, but that alone is not a reason to take on a new payment.
• There is no lump sum at the end, because we never held your money. Some people want a forced savings account, and a credit-builder loan is a better fit for that.

What should I ask before I open any credit builder?

• Don't stop at the monthly number. Add up the subscription charges, interest, and fees, then look at what money, if any, you'll get back. That's the real cost. Ask which bureaus get reports, whether a limit is reported, and what happens if you miss a payment or close the account.
• Ask whether you could still make the payment if this month gets expensive. In a 2020 CFPB study, credit-builder loans were less helpful for people who already had debt, and their late payments on other loans increased.²

What a credit builder is not

• Cash you can spend freely. A credit-builder loan generally holds its proceeds until they are released. Solid's line can only cover the specified subscription. A secured spending card works differently: it can be used for purchases backed by funds you add.
• A fast fix. If someone promises a quick score jump, be skeptical. A new account can take time to show up, and no product guarantees a particular increase. What you're building is a record of steady payments.
• A way out of high card balances. A credit builder won't pay down what you already owe, and adding a new line doesn't change the balances you already carry. Those are still yours to tackle.

Whether any of this is worth it for you depends on the problem you have and on whether you can afford the payment.

Common questions

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How credit utilization works (and why it matters so much)