Credit-Builder Loans vs. Secured Credit Cards: Which Is Better?

Quick Answer

Credit-builder loans and secured credit cards can both be effective tools for building or improving credit. Secured credit cards require that you have cash for a deposit, and credit-builder loans tend to work best for people who don’t have existing debt.

What Is a Credit-Builder Loan?

A credit-builder loan is exactly what it sounds like—a loan whose purpose is to help you build credit. But it turns the traditional lending process upside down. You make payments, which can be reported to the credit bureaus, and, once the loan has been repaid, you get access to the money minus any fees and interest.

The loans typically have terms of six to 24 months. Payments could be as little as $10 a month. It is smart to choose a credit-builder loan with a payment that you can easily afford. A late payment can do serious damage to your credit. If your goal is to build a record of on-time payments, it's better to make small payments on time than to have larger late payments.

You'll also want to shop carefully, comparing fees, interest rates and annual percentage rates (APRs), which combine all the loan costs to calculate a rate. Interest rates and overall costs can vary widely. You'll also want to be certain that the loan you choose reports to all three major credit bureaus (Experian, TransUnion and Equifax) to ensure you're building credit across the board.

A 2020 Consumer Financial Protection Bureau study found that credit-builder loans were most useful for people who did not have existing debt. Those without debt saw credit scores increase 60 points more than those who had debt when they took out a credit-builder loan.

Pros and Cons of Credit-Builder Loans

Credit-builder loans aren't the right choice for everyone. Here are some pros and cons to consider.

Pros of Credit-Builder Loans

No security deposit required
Easier to qualify for than traditional personal loans
Can improve credit scores if you make payments on time, every time
Offer access to a savings account, which could be the beginning of an emergency fund, at the end of loan term

Cons of Credit-Builder Loans

Unavailable to people who have a history of banking problems as noted on their ChexSystems report
Require that the borrower have a source of income
Can harm credit if payments are 30 or more days late
Likely not a good choice if you have debt already

What Is a Secured Credit Card?

A secured credit card is a credit card secured by a deposit that you make with the credit card issuer. That amount is typically your credit limit, or a significant portion of it. Because the issuer has access to the deposit in the event you do not pay, the risk is lower, so qualification standards can be more relaxed. A secured credit card can be a good choice if you have cash for a deposit and are looking to build or rebuild your credit.

As with credit-builder loans, paying on time, every time is crucial.

However, a secured credit card differs from a credit-builder loan in some important respects. Credit cards, secured or not, are revolving accounts and as such do not have a set borrowing period. Consumers have some say in how much they owe and how much they repay each month, once the minimum is covered.

Keeping balances low relative to credit limits—known as your credit utilization rate—and ideally paying your balance in full each month is the best way to use a secured credit card to improve credit. Maxing out a credit card or carrying a high balance, even if you pay the minimum on time, can hurt your credit.

Find the best secured credit cards with Experian.

Pros and Cons of Secured Credit Cards

Secured credit cards, managed responsibly, can help you build credit if you consistently pay on time and are able to keep balances low relative to credit limits. Here are benefits and drawbacks to consider.

Pros of Secured Credit Cards

Can help build credit with both positive payment history and a low credit utilization
Easier to qualify for than unsecured credit cards
Can be used the same way as an unsecured credit card
May not require a credit check
May offer automatic conversion to an unsecured credit card and return of security deposit after a certain number of on-time payments

Cons of Secured Credit Cards

Require a cash deposit
May have a relatively low credit limit
Typically have above-average interest rates
Can hurt credit if you pay late or have a high credit utilization

Credit-Builder Loans vs. Secured Credit Cards: Which Is Better?

Both credit-builder loans and secured credit cards can help people build or rebuild credit. Secured credit cards can be a good choice if you have the money for a deposit and the skills to manage a credit card. But if you can't provide a security deposit, you might be able to qualify for a credit-builder loan.

Credit scores reward you for responsibly managing more than one kind of credit. A credit-builder loan is installment credit—a loan with payments that are the same for a set term. Credit cards are a type of revolving credit—credit lines that allow you to borrow and repay up to a certain limit. It's possible to have both a secured credit card and a credit-builder loan.

If you need to choose, consider which one you are more likely to qualify for. Consistent, on-time payments on a small credit-builder loan or secured credit card, used lightly and paid in full each month, can put you in a good position to build credit. If you already carry debt, a secured credit card may be better.

Other Ways to Build Credit

Credit-builder loans and secured credit cards are not the only ways to build credit. Others include:

Getting added as an authorized user to a loved one's credit card, preferably one with a long history of on-time payments and a low credit utilization
Using a rent-reporting service to report rent payments to credit bureaus
Using Experian Go™ to create a credit file if you have never used credit of any kind before
Using Experian Boost^®^ø, a free feature that can add household bill payments, such as utilities and phone, to your Experian credit report
Getting a cosigner (who will be fully responsible for the loan if you don't pay) if you need a loan

The Bottom Line

Building or rebuilding credit is a journey, and no matter which tools you use to get started, it's a good idea to check on your progress. You can check your credit report and score for free with Experian to be sure your payments are being reported and to keep an eye on your credit as you work to improve it.

How Good Is Your Credit Score?

300 credit score 301 credit score 302 credit score 303 credit score 304 credit score 305 credit score 306 credit score 307 credit score 308 credit score 309 credit score 310 credit score 311 credit score 312 credit score 313 credit score 314 credit score 315 credit score 316 credit score 317 credit score 318 credit score 319 credit score 320 credit score 321 credit score 322 credit score 323 credit score 324 credit score 325 credit score 326 credit score 327 credit score 328 credit score 329 credit score 330 credit score 331 credit score 332 credit score 333 credit score 334 credit score 335 credit score 336 credit score 337 credit score 338 credit score 339 credit score 340 credit score 341 credit score 342 credit score 343 credit score 344 credit score 345 credit score 346 credit score 347 credit score 348 credit score 349 credit score 350 credit score 351 credit score 352 credit score 353 credit score 354 credit score 355 credit score 356 credit score 357 credit score 358 credit score 359 credit score 360 credit score 361 credit score 362 credit score 363 credit score 364 credit score 365 credit score 366 credit score 367 credit score 368 credit score 369 credit score 370 credit score 371 credit score 372 credit score 373 credit score 374 credit score 375 credit score 376 credit score 377 credit score 378 credit score 379 credit score 380 credit score 381 credit score 382 credit score 383 credit score 384 credit score 385 credit score 386 credit score 387 credit score 388 credit score 389 credit score 390 credit score 391 credit score 392 credit score 393 credit score 394 credit score 395 credit score 396 credit score 397 credit score 398 credit score 399 credit score 400 credit score 401 credit score 402 credit score 403 credit score 404 credit score 405 credit score 406 credit score 407 credit score 408 credit score 409 credit score 410 credit score 411 credit score 412 credit score 413 credit score 414 credit score 415 credit score 416 credit score 417 credit score 418 credit score 419 credit score 420 credit score 421 credit score 422 credit score 423 credit score 424 credit score 425 credit score 426 credit score 427 credit score 428 credit score 429 credit score 430 credit score 431 credit score 432 credit score 433 credit score 434 credit score 435 credit score 436 credit score 437 credit score 438 credit score 439 credit score 440 credit score 441 credit score 442 credit score 443 credit score 444 credit score 445 credit score 446 credit score 447 credit score 448 credit score 449 credit score 450 credit score 451 credit score 452 credit score 453 credit score 454 credit score 455 credit score 456 credit score 457 credit score 458 credit score 459 credit score 460 credit score 461 credit score 462 credit score 463 credit score 464 credit score 465 credit score 466 credit score 467 credit score 468 credit score 469 credit score 470 credit score 471 credit score 472 credit score 473 credit score 474 credit score 475 credit score 476 credit score 477 credit score 478 credit score 479 credit score 480 credit score 481 credit score 482 credit score 483 credit score 484 credit score 485 credit score 486 credit score 487 credit score 488 credit score 489 credit score 490 credit score 491 credit score 492 credit score 493 credit score 494 credit score 495 credit score 496 credit score 497 credit score 498 credit score 499 credit score 500 credit score 501 credit score 502 credit score 503 credit score 504 credit score 505 credit score 506 credit score 507 credit score 508 credit score 509 credit score 510 credit score 511 credit score 512 credit score 513 credit score 514 credit score 515 credit score 516 credit score 517 credit score 518 credit score 519 credit score 520 credit score 521 credit score 522 credit score 523 credit score 524 credit score 525 credit score 526 credit score 527 credit score 528 credit score 529 credit score 530 credit score 531 credit score 532 credit score 533 credit score 534 credit score 535 credit score 536 credit score 537 credit score 538 credit score 539 credit score 540 credit score 541 credit score 542 credit score 543 credit score 544 credit score 545 credit score 546 credit score 547 credit score 548 credit score 549 credit score 550 credit score 551 credit score 552 credit score 553 credit score 554 credit score 555 credit score 556 credit score 557 credit score 558 credit score 559 credit score 560 credit score 561 credit score 562 credit score 563 credit score 564 credit score 565 credit score 566 credit score 567 credit score 568 credit score 569 credit score 570 credit score 571 credit score 572 credit score 573 credit score 574 credit score 575 credit score 576 credit score 577 credit score 578 credit score 579 credit score

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Credit-Builder Loans vs. Secured Credit Cards: Which Is Better?

In this article:

What Is a Credit-Builder Loan?

Pros and Cons of Credit-Builder Loans

Pros of Credit-Builder Loans

Cons of Credit-Builder Loans

What Is a Secured Credit Card?

Pros and Cons of Secured Credit Cards

Pros of Secured Credit Cards

Cons of Secured Credit Cards

Credit-Builder Loans vs. Secured Credit Cards: Which Is Better?

Other Ways to Build Credit

The Bottom Line

Instantly raise your FICO^® Score for free

How Good Is Your Credit Score?

Resources

Latest Research

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In this article:

What Is a Credit-Builder Loan?

Pros and Cons of Credit-Builder Loans

Pros of Credit-Builder Loans

Cons of Credit-Builder Loans

What Is a Secured Credit Card?

Pros and Cons of Secured Credit Cards

Pros of Secured Credit Cards

Cons of Secured Credit Cards

Credit-Builder Loans vs. Secured Credit Cards: Which Is Better?

Other Ways to Build Credit

The Bottom Line

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