These tools serve the same basic purpose — but with all-important differences.
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 $1,500 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 three 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 (and if yours doesn’t, you should find one that does).
How do credit-builder loans differ from secured credit cards?
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 CD 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 loan | Secured card | |
|---|---|---|
| Collateral requirements | None | Upfront deposit that determines the card’s credit limit |
| Interest | APRs as low as 4.10%. Earn interest on the loan amount with each monthly payment. | APRs as low as 9.99%. Pay interest on purchase balances not paid in-full by due date. |
| Access to funds | Not accessible until terms are satisfied | Revolving access to funds up to credit limit |
What are the benefits and drawbacks 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
Build your credit score with Self Lender
Establish credit with no upfront deposit by paying into a Self Lender credit builder account. Your monthly payments get reported to three major credit rating bureaus, and at the end of the term, you get your money back from an interest-bearing CD.
What are the benefits and drawbacks 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.
Our top picks for secured credit cards of 2018
Cons
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.
An option if you need cash right away: Online installment loans
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.
I just got a Discover It secured credit card with a CL of $1100. Will I build credit faster if I open a credit builder loan on top of that, or should I only use one or the other? I have the financial means to have both.
Hi Matthew,
Thanks for your inquiry.
There’s no restriction to have both credit-builder and secured credit card accounts at the same time. If your goal is to boost your creditworthiness, these two can help you build your credit faster provided you are also responsible for your borrowings and are able to service your debts on time.
Cheers,
May