Editor's choice: Self Credit Builder Account
- Start with as little as $25/month
- Save for 12 or 24 months
- Money is FDIC-insured and earns interest
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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.
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.
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).
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|
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.
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.
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