Secured Credit Card or Credit Builder Loan: What Makes the Most Sense for Your Credit?

CBL vs. SCC - which is right for you

By Eric Rosenberg

If you’re brand new to credit or have a negative credit history from past mistakes, you may have run into frustrations applying for new credit. If you’re committed to starting out on the right foot or want to rebuild your credit, there are two types of credit designed just for you that are important to know about.

Secured credit cards and credit builder loans are designed for people who have no credit history or bad credit to help them establish credit at the major credit bureaus.

Here’s want you need to know about secured credit cards and credit builder loans and how to tell which one's the right call for your credit.

What’s a secured credit card?

A secured credit card is a type of credit card designed for people with no credit or bad credit. Instead of depending solely on a credit check, companies that issue secured credit cards ask for a cash deposit.

This refundable security deposit protects the lender from losses if you don’t pay back what you spend with the card. Otherwise it works just like a traditional credit card.

When you open a secured credit card, you typically have to put down a deposit at the financial institution equal to the credit limit. For a $500 credit limit, for example, you would need to put down a $500 deposit. If you pay off the card in full and close the account, you generally get your entire deposit back.

Sometimes the card issuer will even refund a portion or all of your deposit and upgrade you to a partially-secured or unsecured credit card.

You can use this card to make purchases up to the card’s limit, though it’s a good idea to stay below 20% to 30% of your total limit (AKA 20-30% of your “credit utilization”) to help your credit score. If you pay it off in full by the due date, you won’t have to pay any interest. If you carry a balance from month-to-month, you are required to pay interest at the card’s regular interest rate.

Pros

Cons

  • If you don’t pay off your balance, you may lose your deposit
  • Late payments, missed payments, and high balances hurt your credit score
  • Some secured cards charge an annual fee

What is a credit builder loan?

A credit builder loan is a type of loan designed specifically to help you build credit. People new to credit in the US or with bad credit can get approved for this kind of loan without any hard credit check.

While it is reported to the credit bureaus like a traditional installment loan, there are some important differences to know about.

Some credit builder loans, like the one offered at Self, doesn’t require or distribute any money upfront. Instead, you make a monthly payment toward a loan balance. The payment is split between interest and a credit builder CD.

A CD, or Certificate of Deposit, is a type of savings account. At the end of your loan’s term, you get a cash payout from the CD.

For example, let’s say you save $25 per month. The loan shows up on your credit report and could help your credit score, assuming you pay on time every month. At the end of the loan, you get all of your money back, less interest. You can choose the payment term and monthly payment amount to fit within your budget.

Pros

  • Build credit with on-time monthly payments
  • You get money back at the end of your loan’s term
  • Open an account with bad credit or no credit history
  • Choose your monthly payment and term

Cons

How could they work together to help you build credit?

Your credit score is made up from information on your credit report. The two biggest factors, which make up about two-thirds of your credit score, are your payment history and credit balances. These are also two of the places where you can make the most impactful changes to your credit.

Adding both of these accounts at once, if managed responsibly, adds two new credit accounts to your credit report. Paying on time adds two positive payments to your history every month.

If you keep the balance of the secured credit card low, or ideally pay it off in full each month, you will also make good progress on managing your balances well.

While two new credit accounts may temporarily lower a credit score, adding both of these accounts also improves your credit mix. While it’s a smaller part of your credit score, having a mix of different types of credit is a good thing in the eyes of lenders. With both a credit card and an installment loan, these accounts can help your credit in multiple ways at once.

Over a few months, the positive effects of two perfectly maintained accounts should negate any impact from your new accounts. After a year or more, using these accounts as intended should help your credit, depending on your situation when you start out.

Is there one that’s better to start with first?

As of now, getting the Self Visa® Credit Card, a secured credit card, requires first opening a Credit Builder Account and reaching a $100 balance while maintaining the account in good standing, among a few other requirements. In this case, there’s no hard credit check required for either tool.

Some other secured cards let you put a security deposit down to get started, though they often have minimum credit score requirements and require a hard credit check.

If you don’t have a deposit saved up, a secured card may not be an option right now in either case.

Opening a credit builder loan first helps you establish good habits with your credit. Adding a secured credit card is a logical next step, as it requires a bit more monitoring and work to manage.

What’s most important for your credit is a commitment from you to pay everything on time and keep balances low from today forward. If you can do that, and avoid regularly opening and closing too many accounts, you’ll be on track to for good-to-excellent credit in the future.

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How do you choose which one to use?

If you have zero credit history, or no history of installment credit on your credit report, the best place to get started might be with a Credit Builder Account, such as the one offered by Self or some other providers.

This loan helps you start saving up a nest egg that you’ll get back when the account matures and provides a way to get into a habit of making on-time payments every month.

If you already have installment credit and decent credit, sometimes a better option might just be to go straight for a secured card. Though it really depends on your unique credit situation.

In either case, you are taking action to improve your credit. Good credit can save you money on deposits at apartments and utilities. It can help you get approved for a car loan or a home loan at the best possible interest rates. Over the life of a mortgage, that could save you tens of thousands of dollars!

Your credit is too important and valuable to ignore. Build or rebuild starting today. You won’t regret it.

About the author

Eric Rosenberg is a former bank manager and corporate finance worker with a Bachelor’s degree and MBA in finance. His work is featured at Business Insider, Credit Karma, The Balance, Investopedia, and many other websites and publications.

Written on January 7, 2020

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

Disclaimer: Self is not providing financial advice. The content presented does not reflect the view of the Issuing Banks and is presented for general education and informational purposes only. Please consult with a qualified professional for financial advice.

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