It can take some time to build a credit history. Sure, you might see your first credit score within a few months of opening your first credit account. But to really build a credit history and a resulting credit score that you’ll be proud of (and that will work for you and not against you), it’s simply not going to happen overnight.
That said, for those who want to build a credit history fast, or those who need to repair a subpar credit score, there are some approaches that you can take that can work faster than others. Both credit builder loans and secured credit cards offer a great way to put you on the path to a strong credit score. But they’re not for everybody.
If you want to learn more about credit builder loans and secured credit cards, this article is for you.
Quick Answer: What Is the Difference Between a Credit Builder Loan and a Secured Credit Card?
A credit builder loan is an installment loan designed to help you establish a payment history. Instead of receiving the money upfront, the funds are generally held in an account while you make scheduled payments.
A secured credit card works more like a traditional credit card but requires a refundable security deposit. Both can help build credit when payments are reported to the credit bureaus. The right choice depends on how you prefer to borrow, make payments, and access funds.
How Does a Credit Builder Loan Work?
Let’s start by explaining what a credit builder loan is. A credit builder loan is pretty much what it sounds like: a short-term loan designed to help you establish good credit habits and a healthy credit history. Most credit builder loans are between $300 and $1,000 and must be paid back, with applicable interest, within six to 24 months.
However, the process for this type of loan is a bit different than what you might assume. With a credit builder loan, you don’t receive access to the funds right away. Instead, it typically works like this:
- The lender sets aside the loan funds. The money is placed in a restricted savings account or similar account rather than given to you upfront.
- You make scheduled payments. You repay the loan over a set period, with payments generally covering principal and interest.
- Your payments may be reported. Depending on the lender, payment activity may be reported to one or more of the three major credit bureaus.
- You receive the funds. Once you complete the repayment period, the accumulated money is generally released to you according to the lender’s terms.
The benefit of a credit builder loan is that you have the ability to establish a good payment history. And payment history alone comprises 35% of your credit score.
How Does a Secured Credit Card Work?
A secured credit card works a bit differently than a credit builder loan. It also doesn’t work quite like a traditional credit card. In this case, you provide a cash deposit up front, which equals your credit limit. Think of that deposit as collateral.
Here’s how the process works:
- You use the card to make purchases. Each purchase adds to your balance.
- You pay your monthly bill. Your deposit does not cover your bill. You still need to make at least the minimum payment due.
- You can avoid interest by paying in full. Paying your statement balance by the due date generally lets you avoid interest on purchases, depending on the card’s terms.
- Your available credit is replenished. As you repay your balance, that credit becomes available to use again.
Basically, a secured credit card is a revolving credit account. Depending on the issuer, you may eventually qualify to transition to an unsecured card or receive your deposit back when you close the account in good standing.
Comparing Credit Builder Loans and Secured Credit Cards
As mentioned earlier, these credit-building options aren’t for everyone. If your credit score is relatively healthy, falling in the good range or higher (670 to 850), you are more likely to benefit from a traditional loan or credit card offer. But if your credit score is 669 or lower and you want to give it a boost, these options are highly effective, provided you make your payments on time and fulfill your credit agreement.
So, how do the two compare? Here’s a quick look at some of their main differences:
| Credit Builder Loan | Secured Credit Card | |
| Type of credit | Installment | Revolving |
| Money upfront | Loan funds are typically held in an account | Security deposit is typically required |
| Access to funds | Usually after completing repayment | Credit can be used for purchases |
| Payments | Fixed payments on a set schedule | Vary based on balance and card terms |
| Interest | Typically charged on the loan | May be charged if you carry a balance |
| Credit utilization | Does not apply in the same way | Your balance affects your utilization |
| At the end | You generally receive the accumulated loan funds | Your deposit may be returned based on the issuer’s terms |
Exact interest rates, fees, deposit requirements, repayment periods, and other terms vary by financial institution. Always review the account agreement (and read the fine print) before deciding which option makes sense for you.
How Can Each Option Affect Your Credit?
The question now is: how do these options affect your credit? The answer really boils down to your payment history. But to understand that, it may help to know what goes into your credit score in the first place.
Here are the ranges that FICO uses when factoring your credit score:
- Payment history (35%): Whether you pay your credit accounts on time.
- Amounts owed (30%): How much debt you owe, including how much of your available revolving credit you are using.
- Length of credit history (15%): How long you have been using credit.
- New credit (10%): Recently opened accounts and applications for new credit.
- Credit mix (10%): Your experience managing different types of credit, such as installment loans and credit cards.
So, if you make your credit builder loan and secured credit card payments on time, your credit score will naturally start to increase as time goes on. But these credit products can help you in other ways, too. When you apply and are approved for one of these products, it creates a new credit signal. Simply stated, having different types of credit can help your credit score. So, a credit builder loan and a secured credit card can help with both the new credit and credit mix factors.
And of course, your length of credit history is important, too. So, the longer you have credit products, the more of a boost it can give to your credit score.
Which Option Is Right for You?
It can feel overwhelming to decide which path to take. Here is some general guidance that you can use to make an informed decision.
- Choose a credit builder loan if you don’t need immediate access to the funds and prefer a fixed payment arrangement
- Choose a secured credit card if you are ready to manage credit and want simple purchasing abilities
Finding the Right Path to Building Credit
If your credit score is currently sitting at 669 or below, either a credit builder loan or a secured credit card can help you develop healthy financial habits that can give your score a boost. Consistent on-time payments for either option over a three- to six-month period will result in a boost to your credit score, provided you are not missing payments or over-utilizing other credit products.
Ultimately, the best rule of thumb is to make sure you can consistently make at least your monthly payments, and keep spending in moderation. Responsible borrowing is the key to a healthy credit score.
Frequently Asked Questions
Is a credit builder loan better than a secured credit card for building credit?
Neither option is automatically better for building credit. The right choice depends on your financial situation, spending habits, and ability to manage payments. Both may help establish payment history when account activity is reported to the credit bureaus.
Can a credit builder loan and secured credit card raise your credit score?
A credit builder loan or secured credit card may help your credit score when you manage the account responsibly and payments are reported. However, neither can promise a specific score increase because credit scores consider several factors.
Do you get your money back from a secured credit card?
You may receive your secured credit card deposit back when you close the account in good standing or transition to an unsecured card. Deposit-return policies vary by issuer, and unpaid balances or fees may affect the amount returned.
What happens to the money from a credit builder loan?
With a credit builder loan, the borrowed money is generally placed in a restricted account while you make scheduled payments. The funds are typically released to you according to the lender’s terms, often after you complete repayment.
Can you have a credit builder loan and a secured credit card at the same time?
You can have both a credit builder loan and a secured credit card at the same time. However, this also means managing two credit accounts and their associated payments and costs, so consider whether both fit your budget comfortably.
