Glossary
Credit-builder loan
A small loan whose proceeds are held in a locked account while you make payments — designed purely to build a payment history.
A credit-builder loan flips the usual order: instead of getting the money upfront, you make fixed monthly payments and receive the funds (minus interest and fees) at the end. Each on-time payment is reported to the credit bureaus, building the payment history that drives most of your score. It is one of the cheapest, lowest-risk ways for someone with thin or damaged credit to establish a track record — usually a better first step than a high-rate bad-credit loan.
Related terms
- FICO score The most widely used credit-scoring model among lenders, built by Fair Isaac Corporation — often used interchangeably with "credit score," though VantageScore is a common alternative.
- DTI Debt-to-income ratio: monthly debt payments divided by gross monthly income. Most lenders draw the line at 36–43%.
- Credit report The detailed record of your borrowing history that your credit score is calculated from — maintained by the three national bureaus.
- Short sale Selling a home for less than what is owed on the mortgage, with the lender's approval — an alternative to foreclosure.
- Subprime loan A loan made to a borrower with a low credit score, priced with a higher rate to offset the added default risk.
- Balloon payment A large lump sum due at the end of a loan term, after years of smaller payments that didn't fully pay off the balance.