A credit-builder loan is a product whose main purpose is to create a record of on-time payments on your credit report. Unlike an ordinary loan, you usually don’t receive money up front. You make regular payments, the provider reports them to one or both credit bureaus as an instalment account or line of credit, and some programs return part of what you paid as savings at the end. This page explains how the different versions work, what they cost, who they suit and how they compare with the other ways to start a credit file. It belongs to our credit score guides.
How a credit-builder loan works
Canadian products sold for credit building follow one of three patterns:
| Type | How it works | Provider example (in its own words) |
|---|---|---|
| Reported instalment payments, no cash advanced | You pay a fixed amount on a schedule; the provider reports the payments as an instalment loan. | Borrowell: “Credit Builder is not a traditional loan where you get cash upfront.” It reports “to Equifax Canada as a Borrowell installment loan with a 48-month term at a 0% APR.” |
| Savings-building program | Part of each payment builds a savings balance, reported as a tradeline, with the savings or a loan offer at the end. | Spring Financial’s The Foundation: “The Foundation is set up as a tradeline on your credit file,” with a “12 month program” in which you “Set aside up to $750.” |
| Interest-free credit-building line | A small line of credit you don’t need to draw on; the provider reports the monthly payments. | KOHO: “Get a dedicated tradeline with no interest,” and “you don’t have to withdraw and use the money to build credit.” KOHO Credit Building covers that product in detail. |
Credit unions and some lenders also offer the traditional version, where the loan amount sits in a locked savings account or term deposit while you repay it and is released when the last payment is made. Terms vary by institution, so the loan agreement is the place to confirm how the funds are held and when they’re released.
Whatever the format, the effect on a credit file comes from the payment record. The Financial Consumer Agency of Canada (FCAC) says payment history is “the most important part of your credit score,” and that “You may have a lower credit score if you only have 1 type of credit product.” An instalment account can add to a file that otherwise holds only a credit card. How credit scores are calculated explains the factors.
What it costs
You are paying for a reported payment record, so the cost is whatever the provider charges for it: interest on a traditional builder loan, or a program or subscription fee on the reported-payment and credit-line versions. Some programs return part of the payments as savings at the end, which offsets the cost. Before signing, the useful figures to find in the agreement are:
- the total you’ll pay over the term, and how much of it comes back to you;
- any set-up, monthly or cancellation fee (Borrowell, for example, says “You can cancel at any time without a cancellation fee or financial penalty”);
- the annual percentage rate, if interest is charged.
Compared with a secured credit card with no annual fee that’s paid in full each month, a builder product usually costs more, because the card itself charges nothing when there’s no balance. The builder product’s advantage is that there’s no revolving credit to run up.
Which bureaus it reports to
Canada has two consumer credit bureaus, Equifax and TransUnion, and a provider can report to one or both. Borrowell’s Credit Builder reports to Equifax Canada; Spring Financial says “We report every payment to the credit bureaus.” A lender that checks only the bureau a product doesn’t report to won’t see it. Equifax vs TransUnion explains how the two differ, and checking your credit score for free shows how to confirm the account has appeared.
Who it helps
- People with no credit file. A builder product can start a file without a credit check: KOHO says “There are no deposits, hard credit checks, or applications,” and Borrowell lists “No hard credit check when you apply.” How to build credit from scratch sets out the full path, and newcomers have extra options in credit cards for newcomers.
- People rebuilding after a bankruptcy or consumer proposal, who may not qualify for unsecured credit for a while. Rebuilding credit after bankruptcy covers the stages, and the consumer proposals and bankruptcy guide covers the processes themselves.
- People with only one type of credit who want an instalment account on file.
Eligibility differs by provider. Borrowell, for instance, says “you must be a Canadian citizen or permanent resident” and “Credit Builder is not available in Saskatchewan.”
A missed payment on a builder product is reported like any other, so the product can lower a score as easily as raise it; what happens if you miss a payment covers the effects. KOHO’s own terms note that “Credit Building is not a credit repair tool”: it adds new history but doesn’t remove existing negative items.
Builder loan, secured card or authorized user
| Credit-builder loan or program | Secured credit card | Authorized user | |
|---|---|---|---|
| Upfront money | None to a small first payment | A refundable deposit | None |
| Credit check | Often none | Varies by issuer | None for the added person |
| Type of account reported | Instalment loan or line of credit | Revolving credit card | None in your name: FCAC says an additional cardholder’s purchases “won’t help you build your credit history” |
| Ongoing cost | Interest or a program fee | Possibly an annual fee; interest only on a carried balance | The primary cardholder’s fees |
| Risk of running up debt | Low: no spending limit to use | Possible if a balance is carried | Depends on the primary cardholder |
A secured card adds a revolving account and lets credit utilization work in your favour; a builder product adds an instalment account without a card to spend on. Some people use both. Whether a secured card suits you is weighed in should I get a secured credit card. Being added to someone else’s card as an authorized user gives you a card to use but, by FCAC’s guidance, doesn’t build a history of your own.
Warning signs of a bad offer
- A loan of cash at a very high rate sold as credit building. A real builder product’s purpose is the payment record, not the cash. Under the Criminal Code, the “criminal rate means an annual percentage rate of interest calculated in accordance with generally accepted actuarial practices and principles that exceeds 35 per cent on the credit advanced.” Payday loans and their alternatives covers short-term lenders, which are regulated separately.
- Fees you can’t add up. If the agreement doesn’t show the total cost over the term, it’s hard to compare with a secured card.
- Promises to remove negative items or guarantee a score. No product can remove accurate information from a credit report before its retention period ends; how long bankruptcy and proposals stay on your report gives those periods. Errors are fixed through the bureaus for free, as described in disputing a credit report error.
- Reporting that isn’t stated. A product that doesn’t say which bureau it reports to may not report at all.