How to establish credit? Credit builder loan vs. secured credit card

Written By Douglas Matus 

A person’s credit score is like a garden: it only grows if you plant the seeds, and even the most well-designed plot can go to ruin through neglect. If you have never taken out a loan or used a credit card, your credit history is basically nonexistent. At the same time, a responsible credit user can lose years of work through an economic downturn or personal misfortune.

Neither of these scenarios will fix themselves; in order to develop your garden, you have to break ground — or start pulling weeds. Two financial products, credit builder loans and secured credit cards, exist to help consumers build or rehabilitate their credit. In order to decide which works best for you, get familiar with the similarities and differences between each.

Credit Builder Loan

Credit builder loans or sometimes called credit builder accounts, available from Self Lender and select credit unions, allow borrowers to positively impact their credit scores and build a personal savings account. Instead of getting the loan payout immediately, borrowers make payments that get placed into an account.

Once the loan gets paid, the borrowers get the full amount of money. David Bakke of explains:

“The loan serves as a sort of layaway for your money. You put money toward your loan over time, and after it has been paid off, you receive the money.”

Money paid toward a credit builder loan also gains interest over the life of the loan, and payments get reported to credit bureaus. Because of this, credit builder loans act as sound personal investments that burnish your credit score in the bargain.

Secured Credit Card

Secured credit cards work just like regular credit cards, except for the security deposit required by the issuer. This security works as a guarantee for the lender and allows them to issue credit to consumers with nonexistent or poor credit scores. In most instances, the amount you can charge reflects the amount of the security deposit.

Though this may sound similar to a debit card, secured credit cards have one important difference: your activity gets reported to the credit bureaus.

“A secured credit card is a revolving account, which means it doesn’t close,” explains Aren Nedeau, director of recruiting and business development for National Credit Care. “Positive credit depends upon open and active accounts.”

Which is the Best for You?

Let’s say that, for ease of management, you only want to choose one financial product to bolster your credit score. In order to choose, you should understand the particular benefits of both credit builder loans and secured credit cards.

Credit builder loans work best for consumers who worry about their ability to manage a credit card. Even with the built-in safeguards of a secured credit card, the cardholder can still damage their credit if payments are not made on time. In order to derive the most benefits for your credit score, you should also pay the card’s balance in full, each and every month. With secured credit cards, you’ll also want to keep an eye on the interest and hidden fees.

“Secured credit cards normally come with a variety of fees,” says David Bakke. “The interest rate is typically higher than with a traditional card, and you need to make sure that the bank you secure your card through reports your spending habits.”

Despite these drawbacks, secured credit cards do come with one benefit over credit builder loans. Once you pay off a credit builder loan, it no longer works to improve your credit scores.

“Credit builder loans generally are for six to 24 months,” says Aren Nedeau. “After those payments have been made, the account closes, which can drop a credit score. The only way to counteract this is to take out another loan.”

No financial product can work to build your credit if it’s used irresponsibly. Credit builder loans and secured credit cards are both available regardless of an applicant’s credit history; missed and late payments will only worsen the situation, however. At best, these products represent an opportunity to correct past mistakes. Credit builder loans and secured credit cards may give you a clean slate — but it’s up to you to write a better financial future.

Written on January 14, 2016

Self Lender is a venture-backed startup that helps people build credit and savings. Comments? Questions? Send us a note at

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