Credit-builder loans and secured credit cards can both be effective tools for building or improving credit. Credit-builder loans typically work best for people who don’t currently have any debt, and secured credit cards require you to have cash on hand for a deposit.
Both secured credit cards and credit-builder loans can help you repair credit mistakes and put you on the credit radar so you can begin building credit. Heres how credit-builder loans and secured credit cards compare, plus how to choose the best option for you.
A secured loan could be the solution you’re looking for if you want to raise your credit score. However, let’s take a closer look at secured loans and how they affect your credit score before you apply.
What is a Secured Loan?
Think of a secured loan as a loan with a safety net. You put up valuable assets, like your car or house, as collateral. This gives the lender peace of mind, knowing they can recover their money if you default on the loan. In return, you often get a lower interest rate and easier approval compared to unsecured loans.
How Secured Loans Affect Your Credit Score
Here’s the good news: secured loans can significantly boost your credit score if you manage them responsibly. Making timely payments consistently is crucial, as payment history accounts for a whopping 35% of your FICO® Score. This positive impact can stay on your credit report for a decade giving your score a long-lasting lift.
On the other hand, failing to make payments on time can have the opposite effect and result in seven years of negative credit report marks. So, before taking the plunge, ensure you can comfortably handle the monthly payments.
Are Secured Loans a Good Idea for Building Credit?
A secured loan can be a valuable tool for building credit if:
- You have a genuine need for the loan: Don’t use it solely for credit-building purposes. It should align with your financial goals.
- You can afford the monthly payments: Use a loan calculator to estimate your monthly payments and ensure they fit comfortably within your budget.
- You have an emergency fund: Life throws curveballs. Having an emergency fund helps you cover loan payments even if your income takes a hit.
- You have some credit history: Ideally, you already have a credit card or another loan, demonstrating your ability to manage credit responsibly.
How to Get a Secured Loan
Getting a secured loan involves comparing offers from different lenders to find the best deal. You’ll typically apply directly with the lender, providing information about your income, debts, and housing costs Expect a credit check, and some lenders may have minimum credit score requirements
Alternatives to Secured Loans for Building Credit
If a secured loan doesn’t feel right, there are other ways to build your credit score:
- Secured credit card: Similar to a secured loan, you provide a cash deposit that acts as your credit limit. Responsible use can boost your score.
- Become an authorized user: Ask a trusted family member or friend to add you as an authorized user on their credit card. Their positive payment history can reflect on your credit report.
- Co-sign a loan: Partner with someone with good credit to co-sign a loan. Their creditworthiness can help you get approved and potentially secure a lower interest rate.
- Get credit for on-time bill payments: Services like Experian Boost® can factor your utility, phone, rent, and some streaming service payments into your credit score, helping you build credit even with limited history.
The Bottom Line
A secured loan can be a powerful tool for building credit, but it’s crucial to use it responsibly and ensure it aligns with your financial goals. Remember, several other options can help you improve your credit score without taking on debt.
Bonus Tip: Check out Experian’s Smart Money™ Digital Checking Account and Debit Card. It helps you build credit without debt and comes with $0 monthly fees.
Disclaimer: Banking services are provided by Community Federal Savings Bank, Member FDIC. Experian is not a bank.
What Is a Secured Credit Card?
A credit card that is secured by a deposit you make with the credit card issuer is known as a secured credit card. That amount is typically your credit limit, or a significant portion of it. The qualification requirements can be loosened since there is less risk because the issuer has access to the deposit in the event that you don’t pay. If you want to establish or repair your credit and have the money for a deposit, a secured credit card might be a good option.
As with credit-builder loans, paying on time, every time is crucial.
However, a secured credit card differs from a credit-builder loan in some important respects. Credit cards, secured or not, are revolving accounts and as such do not have a set borrowing period. After the minimum is paid, customers can choose how much they owe and how much they repay each month.
The best way to use a secured credit card to improve credit is to keep balances low relative to credit limits (also known as your credit utilization rate) and ideally pay your balance in full each month. Even if you make the minimum payment on time, maxing out a credit card or having a high balance can damage your credit.
Pros and Cons of Credit-Builder Loans
Credit-builder loans arent the right choice for everyone. Here are some pros and cons to consider.
How to RAISE Your Credit Score Quickly (Guaranteed!)
FAQ
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