Secured cards and credit-builder loans, side by side
If your file is thin or damaged, the hardest part of building credit is getting someone to lend to you in the first place. Secured cards and credit-builder loans exist to solve that. They work differently, and each suits a different situation.
Secured credit cards
You pay a refundable deposit, and that deposit usually becomes your credit limit. You use the card like any other, and the issuer reports your payments to the credit bureaus.
- Cost: the deposit is returned when you close the account in good standing or move to a regular card. Some cards charge an annual fee; many don't.
- What it builds: a payment history on a revolving account, and a utilization record.
- Use it well: make a small purchase or two each month, pay the statement balance in full, and keep the balance low compared with the limit.
Credit-builder loans
A lender, often a credit union or community bank, holds the loan amount in a savings account or certificate. You make fixed monthly payments, and when the loan is paid off you receive the money.
- Cost: interest and sometimes a fee. Think of it as paying a little to build a record while you save.
- What it builds: a payment history on an installment loan, which can add variety to a file that only has cards.
- Use it well: choose a payment you can comfortably afford every month. A missed payment hurts more than the loan helps.
Side by side
| Secured card | Credit-builder loan | |
|---|---|---|
| Money up front | A deposit, usually refundable | Usually none |
| Monthly commitment | Only what you spend | A fixed payment |
| Account type | Revolving | Installment |
| Best for | Building a card history and low utilization | Building history while saving |
Before you sign up
- Check that the product reports to all three nationwide bureaus. If it doesn't report, it doesn't build anything.
- Read the fees. Avoid products where the fees eat up most of the benefit.
- Some people use both: a secured card for small regular spending and a credit-builder loan for a fixed monthly payment.
This article is general information, not financial or legal advice. Your situation may differ.