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Compare credit-builder loans vs. secured credit cards

These tools serve the same basic purpose — but with all-important differences.

Having poor credit or no credit history can make getting any kind of a credit quite a challenge. In both scenarios, building your credit is part of the way toward a better financial future. Fortunately, lending solutions such as credit-builder loans and secured credit cards can help you establish or reestablish your credit. Which one might work better for you? The answer depends on multiple factors.

Credit-builder loans vs. secured credit cards: How do they work?

Credit-builder loan

A credit-builder loan is a lesser-known borrowing tool designed to establish or boost your credit. Found at select banks and credit unions, these loans lock away an amount from $500 to $5,000 in an account, where your money stays until you pay off the loan. Once you’ve satisfied your loan terms, you get access to the money to use however you wish. And your responsible payments are reported to the 2 credit bureaus.

Secured credit card

A secured credit card can also help you build credit. But unlike a credit-builder loan, you put down a deposit with your application that then becomes your credit limit — or the amount up to which you can spend with your card. The account holding your deposit acts as collateral, protecting the provider against any unpaid purchases. Many secured cards also report your payment history to the major credit bureaus.

What’s the difference?

Credit-builder loans don’t require you to put up collateral. With a secured credit card, you make an upfront deposit that determines your card’s credit limit. But you don’t already need savings for a credit-builder loan — your approved funds will be withheld until you pay the full amount in monthly installments.

With a secured card, you pay interest on your purchase balances. While you’ll also pay interest with your monthly payments on a credit-builder loan, the loan amount stays in a GIC or savings account and earns you interest with each monthly payment until you receive the one lump sum.

The downside of a credit-builder loan is that your approved funds aren’t readily accessible. A secured credit card gives you revolving access to your money right up to your limit. But with a credit-builder loan, your money’s locked away untouchable until you satisfy its terms — a boon for savers.

Credit-builder secured loanSecured card
Collateral requirementsNoneUpfront deposit that determines the card’s credit limit
InterestAPRs around 20%. Earn interest on the loan amount with each monthly payment.APRs around 17.99% or lower. Pay interest on purchase balances not paid in-full by due date.
Access to fundsNot accessible until terms are satisfiedRevolving access to funds up to credit limit

What are the pros and cons of credit-builder loans?

Pros

  • Build — or rebuild — your credit history. You build a history of responsible credit with timely payments to your lender, which should bump up your overall credit score.
  • Save your money with interest. You’ll earn at least a bit of interest with your monthly payments.
  • Predictable repayments. The amount you’ll borrow is low — and so are your payments, making for easy budgeting to keep up with them.
  • End with a nest egg. Because you can’t access your funds until your loan matures, you end up with cash you’ve paid forward over your loan term.

Cons

  • Your money’s locked away. You must wait until the end of your loan term to get access to the money you’ve borrowed.
  • Low borrowing amounts. Lenders for these types of loans typically don’t venture beyond the $25,000 mark. If you’re looking for more, you may need to look elsewhere.

Online credit builder loans

Name Product Interest Rate Loan Amount Loan Term Requirements Credit Score Link
Refresh Financial Credit Builder Loan
19.99%
$1,250 - $10,000
3-5 years
No min. income or employment requirements
Min. credit score: 300
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More Info
No funds are provided by Refresh upfront. Instead, funds are placed into a secured account to be accessed later. Your payments are reported to the credit bureaus, potentially impacting your credit score.
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What are the pros and cons of secured credit cards?

Pros

  • Establish or boost your credit. Most card providers report your successful repayment history to the credit bureaus, which improves your credit score over time.
  • Immediate access to funds. Like an unsecured card, your secured card gives you access to money whenever you need it.
  • Potentially raise your limit. Depending on your card, you might be eligible for a one-time credit limit increase by depositing more money into the account you’re using as collateral.
  • Upgrade to an unsecured card. Some providers reward your history of on-time payments with the opportunity to upgrade to an unsecured card.

Cons

  • Requires upfront deposit. Unlike a credit-builder loan, which doesn’t require you to have savings already, a secured card requires you to deposit money in an account — often one that doesn’t earn interest. Minimums vary by card, but your deposit then becomes your line of credit.
  • Potentially high interest. You’ll pay interest on your purchases that can typically soar beyond 20% APR.

Secured credit cards

Name Product Min. Required Deposit Purchase Interest Rate Cash Advance Rate Annual Fee
Refresh Financial Secured Card
$200
17.99%
N/A
$12.95 + $3/month
The Refresh Secured Card has no credit check, a low annual fee and guaranteed approval once you secure your card with anywhere from $200 - $10,000.
Home Trust Secured Visa (No Annual Fee)
$500
19.99%
19.99%
$0
The no annual fee Home Trust Secured card comes with a standard 19.99% purchase and cash advance rate. Apply with any credit score and start rebuilding your credit.
Home Trust Secured Visa (Low Rate & Monthly Fee)
$500
14.9%
19.8%
$60
Pay a monthly fee of $5 and get a low purchase interest rate of 14.90%.
Home Trust Secured Visa (Low Rate)
$500
14.9%
19.8%
$59
Rebuild your credit score and enjoy a low purchase interest rate of 14.90% and a cash advance rate of 19.80%.
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Which borrowing option is better for me?

Both credit-builder loans and secured credit cards can help you build or rebuild your credit with responsible borrowing. Ultimately, which is better for you will depend on how quickly you need the money and even whether you have a bit to put down right now.

If you have the time to boost your creditworthiness while gathering a little nest egg to spend at the end, a credit-builder loan might be for you. You’ll trade the convenience of no deposit with the inconvenience of waiting until you’ve satisfied your loan terms to spend what you’ve borrowed.

If you have cash on-hand to make a deposit and are looking to increase your credit score through spending, look into a secured credit card. You can often use these cards anywhere that traditional credit cards are accepted, essentially borrowing from yourself while building your credit.

Remember that while you’ll pay interest on purchases made with your secured credit card, money you’ve socked away in a credit-builder loan will actually earn interest in your favor while you pay for it.

Bottom line

You’ll find many financial products that promise to boost your credit: credit-builder loans and secured credit cards are two that do just that. Compare these options against your current savings and spending habits to determine which is best for your situation. You can also learn more about your credit score here.

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