If you have poor or no credit, credit builder loans and secured credit cards allow you to build your credit history. Both require a cash deposit as collateral for the loan or credit limit. Payments or charges are reported to the credit bureaus to establish your payment track record.
But how exactly do credit builder loans compare to secured cards when it comes to building credit? What are the key differences in cost, flexibility, and overall effectiveness? Let’s take an in-depth look at the pros, cons, and differences to help you decide which option may be right for you.
Credit Building Effectiveness
The most important consideration is how quickly and efficiently each option can build your credit. Here is how secured cards and credit builder loans compare:
Payment History
- Credit builder loans – Fixed monthly installment payments help establish positive payment history.
- Secured cards – Paying at least the minimum due monthly builds consistency.
Both options allow you to demonstrate responsible payment behavior which is a primary scoring factor. Loans may have a slight edge due to predictable fixed payments.
Credit Mix
- Credit builder loans – Adds an installment loan to your credit mix.
- Secured cards – Only adds a revolving credit account.
Having both installment loans and revolving credit improves credit mix. Loans can build mix faster with just one account.
Credit Utilization
- Credit builder loans – Loan amounts do not increase balances owed.
- Secured cards – High utilization if large portion of limit is used.
Loans help keep overall utilization lower. Using more than 30% of the card limit can reduce scores.
Credit History Depth
- Credit builder loans – Term length builds history faster.
- Secured cards – History only remains as long as account stays open.
24 month installment loans establish length of credit history more quickly.
Flexibility
- Credit builder loans – Locked payments, terms, and single purpose.
- Secured cards – Can reuse credit, adjust payments, build rewards.
Cards offer significantly more flexibility in how the credit line can be used.
Cost Comparison
Affordability is often a concern when rebuilding credit. Here is how the costs compare:
Interest rates
- Credit builder loans – Often 12% – 15% APR.
- Secured cards – Rates typically 15% – 29%.
Loans offer slightly lower interest rates in most cases.
Fees
- Credit builder loans – Origination and maintenance fees apply.
- Secured cards – Annual, monthly, load, and transaction fees.
Both often have fees, but cards tend to have more fee types.
Deposit amount
- Credit builder loans – Equal to loan amount borrowed.
- Secured cards – Minimum of $200, often as high as $5,000.
Loan deposits align with amount needed. Cards require deposit regardless of credit limit needed.
Access to deposit
- Credit builder loans – Deposit is locked during loan term.
- Secured cards – Deposit is refundable and can be a savings vehicle.
Secured card deposits are more liquid if funds are needed.
Read More: Credit Builder Loans: Weighing the Pros and Cons Before You Decide
Qualification Ease
Because both are designed for poor/no credit applicants, qualification is relatively easy in most cases:
- Credit builder loans – Approval based mainly on income. Credit reports and scores rarely considered.
- Secured cards – Many still consider applicant’s credit profile. Minimum score requirements around 500.
Of the two, credit builder loans generally have easier approval standards. But both offer more realistic approval odds than traditional unsecured credit products.
Graduation Options
An advantage of both credit builders is the potential to “graduate” to better rates and terms.
- Credit builder loans – Good payment history may qualify you for lower rate personal loans.
- Secured cards – After 1+ years of responsible use, providers may upgrade you to an unsecured card.
So both allow access to more affordable mainstream credit after diligent rebuilding.
Flexibility in Use
One of the starkest differences is the flexibility each offers:
- Credit builder loans – Locked savings cannot be spent. Only make set installment payments.
- Secured cards – Can reuse credit line as charges are paid. Payments flexible as long as minimum is met. Rewards potential on some cards.
Secured cards provide much more freedom in how the credit line can be used month to month. Loans are restricted to fixed loan payments.
Summarizing the Key Differences
To recap, here are some of the primary differences between credit builder loans and secured cards:
- Only loans add an installment account to your credit mix.
- Loans establish length of credit history faster.
- Secured cards usage impacts credit utilization month-to-month.
- Loans often feature lower interest rates.
- Secured card deposits tend to be more refundable if needed.
- Loans have fixed payments and terms while cards offer spending flexibility.
- Loans often have lower barriers to approval based mainly on income.
- Only secured cards allow you to reuse credit without needing new applications.
- Secured cards can be upgraded to unsecured cards over time.
There are clear trade-offs when it comes to credit building power, costs, qualifications, and use flexibility.
Which is the Better Choice for You?
Determining which option may be better for you depends largely on your specific financial situation and needs.
Credit builder loans may be better if:
- You need to establish credit history quickly.
- You want the motivation of a deposit to ensure diligent payments.
- You prefer the predictability of fixed monthly loan payments building savings.
- You can qualify based on income but may not meet minimum credit requirements yet.
- You want to avoid temptation to overspend while rebuilding credit.
Secured credit cards may be better if:
- You want the flexibility to reuse credit without taking out new loans.
- You are comfortable making at least the minimum payment each month.
- You want to keep balances very low to avoid high utilization.
- You meet basic credit requirements from some secured card providers.
- You may need access to the deposit for emergencies.
Assess your financial habits and situational needs to determine which features and differences are most relevant to your credit-building goals. This will point you towards the better option for your unique circumstances.
For many, using secured cards responsibly for 6-12 months then adding an installment loan can provide a optimal credit boosting combination.
Strategic Tips for Maximizing Results
Whichever option you choose, be sure to use it strategically to get the fastest credit improvements:
- Make all payments on time, every time. Set up autopay if needed.
- Keep credit utilization very low on secured cards by limiting charges.
- Don’t apply for too many new accounts too quickly. Space out new applications.
- Let the loan or card age on your credit reports for as long as possible before closing.
- Only make the required payments and avoid overspending beyond your means.
- Check your credit reports regularly to ensure on-time payments are reporting accurately.
- Consider adding the other type of account (loan or card) after 6-12 months of diligent payments.
- After 12-24 months of responsible management, explore graduating to unsecured credit products.
The most important success factor is making diligent on-time payments consistently to maximize positive reporting. Either option can quickly build your scores if used proactively and strategically.
Which Path is Right for You?
As you rebuild credit, be sure to open new accounts thoughtfully. Consistent on-time payments are key. If managed properly, adding both types of credit builders at different stages can accelerate your score-building success.
Carefully compare credit builder loans vs secured cards to decide which option may be the better match for your financial situation and credit-improvement goals.