Which Loan Is Best for Building Credit?

Quick Answer

In general, any loan with payments that are reported to the credit bureau will be equally effective for building credit, including auto loans, mortgage loans, student loans and personal loans.

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What Types of Loans Can Help Build Credit?

Any loan that gets reported to the major credit bureaus—Experian, TransUnion and Equifax—has the potential to help you build credit. Here are the most common options.

Credit-Builder Loan

A credit-builder loan is a small installment loan designed specifically to help people establish or improve their credit. Unlike a traditional loan, you don't receive the funds upfront.

Instead, the lender holds the money in a savings account or certificate of deposit while you make monthly payments. Once you've paid off the loan in full, you receive the funds, minus interest and fees (though some lenders may return a portion of the interest you paid or that the account earned during the loan term).

Learn more: How to Get a Credit-Builder Loan

Personal Loan

A personal loan is an installment loan you can use for a variety of purposes, from paying down debt to covering a large expense. Personal loans are typically unsecured, but some lenders offer secured options. If your lender reports payments to the credit bureaus, on-time payments can help build your credit history.

Personal loans may be harder to qualify for if you have no credit history or a low credit score, but some lenders specialize in working with borrowers in those situations.

Learn more: How to Get a Personal Loan: A Step-by-Step Guide

Student Loan

Federal student loans don't require a credit history to qualify, which makes them one of the most accessible loan options for young borrowers who are just starting to build credit.

Both federal and private student loans can help build credit once repayment begins. Also, federal student loans offer more flexibility with late payments. For example, most loans, including private student loans, report missing payments after 30 days. But federal loan servicers wait until 90 days after your first missed payment.

Learn more: How to Get a Student Loan

Auto Loan

An auto loan is a secured installment loan used to finance a vehicle purchase. Because the car serves as collateral, auto loans can sometimes be easier to qualify for than unsecured loans.

Most auto lenders report payments to the credit bureaus, meaning consistent on-time payments can steadily strengthen your credit profile.

Learn more: How to Get a Car Loan

Mortgage Loan

A mortgage is a secured loan used to purchase a home. Monthly mortgage payments are typically reported to all three major credit bureaus, so paying on time can positively impact your credit score over the life of the loan.

However, qualifying for a mortgage generally requires an established credit history, making it less practical as a starting point for building or rebuilding credit.

Learn more: The Complete Guide on How to Get a Mortgage

Does the Type of Loan Matter for Building Credit?

In most cases, the type of loan matters far less than how you manage it. Any loan that reports payments to the credit bureaus can help you build credit if you pay on time. What differs between loan types is how easy they are to qualify for.

If you have little or no credit history, a credit-builder loan or, if you're a college student, a federal student loan may be your most accessible option. Personal loans, auto loans and mortgages typically require some credit history and may come with higher rates—or outright denial—if your credit profile is thin or damaged.

Credit cards work differently from installment loans in that they're a form of revolving credit. This arrangement introduces an additional scoring factor called credit utilization, which is the percentage of your available credit limit that you're using at any given time.

A high utilization rate can hurt your score, while keeping it low can help. With installment loans, your score is more influenced by your payment history and the overall amount you owe.

What Factors Affect Your Credit Score?

Regardless of which loan you use, your credit score is shaped by the same underlying factors. FICO, whose scores are used by 90% of top lenders, calculates your score based on five categories:

Payment history (35%): Whether you pay your bills on time is the single most important factor in your credit score. A consistent record of on-time payments is the most effective way to build credit, while missing payments can do significant damage.
Amounts owed (30%): This looks at the total amount of debt you carry, as well as your credit utilization rate on revolving accounts like credit cards. Keeping card balances low relative to your credit limit helps your score. Those with the highest credit scores typically have utilization rates below 10%.
Length of credit history (15%): The longer you've had credit accounts open, the better. This factor considers the age of your oldest account, your newest account and the average age of all your accounts. Opening many new accounts in a short period can lower your average account age and temporarily hurt your score.
New credit (10%): Applying for credit triggers a hard inquiry on your credit report, which can temporarily lower your score a few points. Hard inquiries stay on your credit report for up to two years but only affect your FICO^® Score^☉ ^Θ for 12 months. The exception is rate shopping for a mortgage, student or auto loan—multiple applications submitted within a short window are typically counted as a single inquiry.
Credit mix (10%): Having a variety of credit types, such as a credit card, an auto loan and a mortgage loan, can benefit your score. That said, it's best to avoid taking on debt you don't need just to diversify your credit mix.

Start Building Credit Today

No matter which loan type you choose, the fundamentals are the same: Make your payments on time, keep your debt manageable and give your credit history time to grow.

If you want to monitor your progress along the way, Experian offers free credit monitoring with your Experian credit report and FICO^® Score. You can also use Experian Boost^®^ø^®^ø to get credit for on-time payments you're already making, like rent, utility bills, phone bills and popular streaming services, which can raise your FICO^® Score instantly.

How Good Is Your Credit Score?

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Which Loan Is Best for Building Credit?

In this article:

What Types of Loans Can Help Build Credit?

Credit-Builder Loan

Personal Loan

Student Loan

Auto Loan

Mortgage Loan

Does the Type of Loan Matter for Building Credit?

What Factors Affect Your Credit Score?

Start Building Credit Today

Instantly raise your FICO^® Score for free

How Good Is Your Credit Score?

Resources

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In this article:

What Types of Loans Can Help Build Credit?

Credit-Builder Loan

Personal Loan

Student Loan

Auto Loan

Mortgage Loan

Does the Type of Loan Matter for Building Credit?

What Factors Affect Your Credit Score?

Start Building Credit Today

Instantly raise your FICO® Score for free

How Good Is Your Credit Score?

Resources

Latest Research

Latest Reviews

Instantly raise your FICO^® Score for free