Top Loans for Building Credit

Building credit can be tricky because you often need credit to get credit. This can be frustrating for people who are new to credit or want to diversify their credit profile. Lenders are usually hesitant to approve people with low credit scores or limited credit history. If this sounds like you, a credit-building loan might be just what you need.

A credit-building loan is a type of Canadian loan specifically designed to help people with little or no credit history and works differently from a regular loan. Instead of getting the money right away and paying it back over time, you make fixed payments to the lender first. At the end of the loan term, you get the loan amount.

You don’t need to have good credit to get a credit-building loan, but you must have enough income to make the payments. Below, we’ve listed some of the top credit-building loans in Canada for you to consider.

KOHO Credit Building

KOHO Credit Building offers two ways to build your credit history:

• Credit Building

• Flexible Credit Building

To sign up, you need a KOHO account. New users can sign up for these credit-building programs in their KOHO app. The credit building program costs $5, $7, or $10 per month, depending on the account type. The Flexible Credit Building program requires users to provide a security deposit between $30 and $500 and has a $5 per month service fee.

KOHO Credit Building users see an average credit score increase of 22 points after just three months.

Credit Building

Once you sign up, you’ll get a $225 tradeline with no fees or interest, separate from your available balance. Your subscription renews automatically, so make sure you have enough money in your account each month to cover the fee. Consider having overdraft protection in case you forget one month.

Set your utilization rate in the app each month on your billing date. Remember to update it every month because it resets to 0% on your billing date. KOHO uses part of these funds when you set your utilization rate and report it to Equifax. You can stay enrolled for as long as you need, but KOHO recommends at least three months for best results.

Flexible Credit Building

You deposit $30-$500 into your account to set up a secured line of credit. You can then transfer these funds to your KOHO account for spending, aiming to stay within 10% of the deposit amount. On the billing date, KOHO will automatically move the funds back into the secured line of credit, so you need to ensure the funds are available in your Spendable balance.

Eligibility

• Must have an active KOHO account

• Must be a Canadian resident

• Must be the age of majority in your province

Benefits

• No hard credit check

• Free credit score checks

• Both options are very affordable

• Payments are automated, so you’re less likely to miss a payment

• You can grow your credit even faster by using both options

• You can cancel at any time without obligation

• An average credit score increase of 22 points after just three months

Drawbacks

• You must have a KOHO account

How to sign up

Open a KOHO account. Then, you can easily sign up for one or both programs through your account in the KOHO app.

Borrowell Credit Builder

Borrowell offers three types of credit-builder loans:

• Starter at $10/month

• Plus at $30/month

• Pro at $50/month

After the 3-year term, you’ll get back between $240 and $1,440, depending on the payment amount you choose.

According to Borrowell, its Credit Builder users see an average credit score increase of 41 points within the first five months.

How it works

You make your chosen monthly payment, and Borrowell reports your on-time payments to Equifax Canada. To help you avoid missing a payment, Borrowell’s Credit Builder automates your payments with a pre-authorized debit agreement. Every month, they report all payments, including missed ones, to Equifax Canada.

Eligibility

• Must be a Canadian citizen or permanent resident

• Must be at or above the age of majority

• Must have at least six months of credit history

• Must have at least two credit products (such as a loan, line of credit, credit card, etc.) on file with Equifax

• Must live in Canada, outside of Quebec, Saskatchewan, or New Brunswick

Benefits

• No hard credit check

• You can pick an amount you know you can pay back

• Payments are automated, so you’re less likely to miss a payment

• You can receive up to $1,440 back when your loan term is done

• An average credit score increase of 41 points within the first five months

Drawbacks

• You must have at least six months of credit history, meaning you need to build a credit history with another credit product first

• You must have at least two credit products on file with Equifax to qualify

• It’s currently unavailable in Quebec, Saskatchewan, or New Brunswick

How to sign up

Visit Borrowell’s website and create an account. After signing up, Borrowell will guide you through the process to apply for Credit Builder.

Spring Financial – The Foundation

Spring Financial’s The Foundation credit builder program is available to everyone, no matter their credit score—all applicants are accepted. And not only does it build credit, but it also builds your savings.

The Foundation costs:

• $55/bi-weekly

How it works

You pay $55 every two weeks, and Spring Financial reports your on-time payments to the Canadian credit bureaus. But that’s not all. More than half of each payment you make is saved in your account, adding up to $750 in the first 12 months, the term’s length (though you can opt to extend it for another six months).

Eligibility

• Must have an active account with a bank or financial institution

• Must have a valid government-issued Canadian ID

Benefits

• Free credit score checks

• No fee cancellation

• You can end up with $750 in savings after 12 months

• You can use your savings at any time, even to make your Foundation payments

• After finishing The Foundation program, you are guaranteed access to the Evergreen Loan, which offers a $1,500 cash advance at an 18.99% interest rate.

Drawbacks

• It costs significantly more than other credit-building options

• It’s currently unavailable in Saskatchewan, Quebec, and New Brunswick

How to get one

Visit Spring Foundation’s website and apply online.

Fairstone Credit Building

Fairstone personal loans are ideal for Canadians with low or fair credit scores who have trouble getting approved by other lenders with stricter credit requirements. Fairstone has lower credit score requirements than other traditional lenders, making it easier for people with poor or fair credit scores to get approved for a loan.

While they are personal loans instead of dedicated credit-builder loans, making your payments on time every month will still help you build credit with a personal loan.

Fairstone offers:

• Secured personal loans ranging from $5,000 to $60,000 for 36 to 120-month terms

• Unsecured personal loans ranging from $500 to $25,000 for six to 60-month terms

Eligibility

• Must be a Canadian citizen

• Must be employed, self-employed or have another source of income, such as a pension, with verifiable documents showing proof of income

• Must be the age of majority in your province or territory

• Must have a credit score of 550

Benefits

• Being a personal loan, you can access your money right away instead of at the end of the term

• They allow loan co-signers

• Offers autopay so you don’t miss a payment

• You can insure your loan

• You can earn up to $500 per year for referring a friend or family member

Drawbacks

• Requires a minimum credit score of 550, so someone with no credit history cannot qualify

• Loans have interest rates (26.99% to 39.99% for unsecured and 19.99% to 24.49% for secured loans)

• Self-employed borrowers must show proof of income from the past two years

How to get one

You can easily apply for a free quote online.

How does a credit-builder loan work?

Credit-builder loans are intended for people with low or no credit scores and operate differently from other loans.

In a traditional loan, you get the money first and then pay it back over time. With a credit-building loan, the lender puts your money into a certificate of deposit or savings account and keeps the money while you make payments. This money is held as collateral, and you don’t receive it until the loan is fully paid off. After you finish all the payments, you get the full loan amount.

You’ll need to make fixed monthly payments, including interest, to the lender throughout the loan term. During the loan period, your on-time payments are reported to at least one major credit bureau. It’s best to find loans that report to both Equifax and TransUnion.

Depending on your loan agreement, the lender might release some funds each time you make a payment, or they might hold all the funds until you complete all payments. At the end, you’ll typically receive the original loan amount minus any fees, and some lenders may also refund part of the interest you paid.

Generally, credit-builder loans are small loans, ranging from $300 to $3,000, and are often offered by smaller lenders like credit unions, community banks, and online lenders.

Using a credit-builder loan removes the risk of personal loans for Canadians, which includes risks like accidentally borrowing more than they can afford to pay back.

How does a credit-builder loan help you build credit?

Credit scores show your credit history and help lenders decide if you can repay debts. If you have no or low credit scores, lenders see you as a risk. Credit-builder loans reduce this risk by holding money as collateral and giving you a chance to improve your credit profile.

When you’re starting to build or rebuild your credit, a credit-builder loan lets you prove that you can make regular, on-time payments. This is important because your payment history greatly affects your credit scores. In fact, payment history is the most significant part of your credit score. A good credit score comes from making payments on time. Credit-builder loans let you borrow a small amount, make regular payments, and prove you can handle credit responsibly by paying off your loan.

However, credit-builder loans won’t help your credit if you miss or make late payments. If you do, your lender can report it to the credit bureaus, which could lower your credit score significantly. Late payments appear on your credit report after 30 days and will stay there for seven years.

Who should consider getting a credit-builder loan?

You don’t need good credit scores to get approved for a credit-builder loan, making them ideal for people with poor or no credit history. This includes young people starting their financial journey, low-income workers who can’t afford debt, and those who haven’t used credit in years.

Sure, people with no credit history can use debit cards or cash, but they have limited access to financial products and services. This can create significant challenges when trying to buy a car or home, get approved for a credit card, or rent an apartment. This is where building credit with a credit-building loan can really help.

If you’re thinking about getting this type of loan, especially if you have other debts, make sure you can handle your other financial responsibilities while repaying the credit-builder loan.

Where can you find credit-builder loans in Canada?

In Canada, there are three types of lenders that provide credit-builder loans.

• Credit unions

• Online lenders

• Big banks

Other options for building credit

In addition to credit-builder loans, there are other ways for you to build credit when you have no or poor credit history, including using a secured credit card, becoming an authorized user on someone else’s credit card, or having someone co-sign a loan with you.

Secured credit card

One option is to get a secured credit card. Secured cards are ideal for beginners because they help build credit when you can’t qualify for a traditional credit card due to low or no credit history.

A secured credit card functions like a regular credit card, and making timely payments helps build a good credit history. With a secured credit card, you pay an upfront deposit, and this deposit usually becomes your credit limit. For example, if you deposit $300, you can spend up to $300.

As you use the card for purchases, this activity is reported to the credit bureaus. It also reports whether you pay your balance on time, if you have any missed payments, and how much money is on your card. As long as you make your payments on time, even the minimum payment, this positive payment history will help improve your credit score.

Authorized user

Do you know someone trustworthy, like a parent or spouse, who has good credit? If so, consider asking them if you can become an authorized user on their credit card. What this means is you’ll receive a credit card in your name, but it will be connected to the other person’s credit account and credit report.

As an authorized user, you can use the card to make purchases, but the main cardholder is responsible for paying the credit card bill. Their good credit habits can help you build your credit and improve your credit scores. Usually, there’s no credit check or application needed to become an authorized user.

By doing this, you’ll benefit from their good credit habits, as well as your own, which can help build your credit history. However, any negative credit behaviour by either of you will impact both of your credit scores, so make sure you practice good financial habits.

Co-signer

As you know, you may not be able to get a personal loan with bad credit. However, if you need a personal loan where you can access the money right away, instead of at the end of the term, like with a credit-building loan, one way you may qualify for an unsecured personal loan is by asking a family member or loved one with good credit to be a co-signer.

By having a co-signer on your loan, the lender can use the co-signer’s credit score instead of yours, meaning you may qualify for a loan that you wouldn’t on your own. You may also get better loan terms this way. Lenders are generally more willing to approve a loan with a co-signer who has a positive credit history because if you don’t repay your loan, they can make the co-signer responsible for your loan payments.

Is a credit-builder loan right for you?

Credit-builder loans can help improve your credit and save money, especially for people with no credit history or those looking to improve their credit score. They are a good option if you:

• Have a steady income

• Can make regular, on-time payments

• Don’t need the money right away

The fastest you can typically get the full loan amount is six months after making consistent on-time payments, so if you need the money immediately, you may want to consider having a co-signer on an unsecured loan instead.

Also, if you have already taken out loans or opened other credit accounts to build credit, you may not benefit as much from a credit-builder loan as someone without a credit history.

Start building your credit today with KOHO

Using a personal loan to boost your credit is a popular option, but remember that missing payments can hurt your credit instead. A safer way to start building credit is with KOHO’s Credit Building program. When you sign up, you’ll get a special tradeline with no fees or interest, made for building credit. You make a payment on this tradeline once a month, and payments are automated, meaning you’re less likely to ever miss one. By paying your bills on time each month, you can build a good credit history and raise your credit score.

FAQs for credit-building loans

Is a credit builder loan a good idea?

Yes, a credit builder loan is a good idea if you want to build or improve your credit score. By making regular, on-time payments, you can show good credit habits and boost your credit history.

What is a loan that helps build credit?

A credit builder loan is a special loan designed to help you build credit. You make monthly payments, and the lender reports your payment history to one or both credit bureaus, which helps improve your credit score.

How much money can I get from a credit builder loan?

A credit builder loan usually offers an amount between $300 and $3,000. The exact amount depends on the lender and the specific loan terms they offer.

Do credit builder loans work?

Yes, credit builder loans work. They help you improve your credit score by making regular, on-time payments that are reported to credit bureaus. Over time, this can boost your credit history and score.

How long does it take to rebuild credit in Canada?

Rebuilding credit in Canada can take several months to a few years, depending on your starting point and financial habits. Regular, on-time payments and responsible credit use will help speed up the process.

How long do missed payments stay on your credit report?

Missed payments that are reported to the credit bureaus will stay on your credit report for seven years.

Do credit builder loans give you money upfront?

Depending on your loan agreement, the lender might release some funds each time you make a payment, or they might hold all the funds until you complete all payments. At the end, you’ll typically receive the original loan amount minus any fees.

Can you spend money from a credit builder loan?

It depends on your loan agreement. For most credit-builder loans, the money is saved while you make payments, and once you finish paying off the loan, you get the total amount saved back. However, for some credit-builder loans, like The Foundation from Spring Financial, you can use your savings at any time.