Borrowers better understand credit builder loans (CBLs) by understanding what they are not. Pros and cons arise through comparison, and that clarity helps borrowers determine if their situation is right for a credit builder loan. Generally, there is an option for everyone.

This investigation leans on work by the Consumer Financial Protection Bureau (CFPB)¹, the Federal Reserve², and the Financial Industry Business Ontology (FIBO)³ to isolate pertinent products and their relevant properties.

This investigation omits rare loans, such as share-pledges, and contextually-distant revolving lines, such as HELOCs, to provide the most relevant information for the standard American borrowers.

10 Loans & Cards Compared

There are 10 primary loans and cards available to consumers, shown below. These options are representative of the consumer financial product space. They are shown in order of importance based on feedback from consumers.

Bonus: Credit Builder Accounts (jump to section →)

How We Choose Them

We continually select product types based on their relevance to common needs of the average American borrower, as well as weight in consumer debt markets (see graph below). These factors ensure comparisons are valuable for the reader's current needs and probable future needs.

Properties Compared

Loan and cards share properties across 4 dimensions called consumer highlights, specifications, lender conditions, and credit reporting. We use these fields to compare each loan or card on 11 properties, shown below.

Consumer Highlights

Specifications

Lender Conditions

Credit Reporting

How We Choose Them

We select properties based on their importance to the end user (borrower) and actively exclude properties that represent significant but unimpactful contrasts.

For example, underwriting technology varies widely across loan types, but it has no value to the user and is therefore excluded.

End-User in Focus

The guiding principal for presentation choices is relevance to consumer borrowers. While lenders and business borrowers may find value, this investigation is not designed for them.

#1 Secured Credit Cards*

* is credit builder product

Summary. Secured credit cards (SCCs) and credit builder loans (CBLs) are both collateralized credit builder tools, but SCCs require the entire deposit up front with no guarantee of refund and do not provide under-market interest rates despite the use of collateral.

Key Difference. Credit builder loans use slow-building collateral to mitigate lender risk and keep interest rates low for poor credit borrowers, whereas secured credit cards use their dominance in the market to demand full coverage upfront without lowering rates. CBL collateral builds over time so the borrower does not have to front a lump sum. SCCs require everything up front.

Key Similarity. SCCs and CBLs are both tools designed for consumer with limited, zero, or damaged credit history.

When are secured credit cards more appropriate than credit builder loans? There is never a reason to use a secured credit card. While they dominated the market a decade ago, alternative cards now provide no-deposit options, many with 0% interest or fees (see next section).

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#2 Credit Builder Cards*

* is credit builder product

Summary. Credit builder cards (CBCs) and loans operate from the same modus operandi: that subprime borrowers should have free & low-interest options to build their score without fronting cash or other assets. CBCs fill the revolving portion of credit mix, while CBLs add installment debt.

Key Difference. The primary difference is that CBCs are revolving credit and CBLs are installment, the impact of which is that CBCs can be used interest and fee-free, whereas nearly all CBLs charge a small amount of interest that amounts to about $8 - $10 per month.

Key Similarity. CBCs and CBLs use savings-based collateral and flexible eligibility criteria to accept borrowers limited, zero, or damaged credit at 0% or otherwise accessible interest.

When are credit builder cards more appropriate than credit builder loans? Borrowers with 5 or more active installment accounts on their account benefit more from CBCs than CBLs, although a good strategy incorporates both.

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#3 Credit Cards (Classic)

Summary. Classic credit cards (CCs) and credit builder loans have little in common, except that credit builder loans and credit cards both appear on credit reports and influence consumer creditworthiness. CBLs are installment credit, whereas credit cards are revolving lines.

Key Difference. Credit cards are revolving credit focus on funding everyday purchases, whereas credit builders use low-rate installment credit to improve consumer credit scores. The impact to consumers is that high-value credit cards are funding tools with reward perks, whereas CBLs help with approval for high-value CCs.

Key Similarity. CCs and CBLs appear on credit reports and influence consumer creditworthiness.

When are credit cards more appropriate than credit builder loans? Credit cards are a better choice for consumers with thick profiles because their rates and rewards outweigh potential costs, usually on the far right of the credit building curve.

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#4 Personal Loan (Traditional Loan)

Summary. Credit builder loans focus on improving credit profiles with flexible eligibility criteria and savings-based collateral, whereas personal loans focus on funding major expenses (other than education) or the purchase of an asset (other than vehicles and homes)

Key Difference. The primary difference between credit-builder and personal loans is purpose. Credit builder loans are designed to improve credit whereas personal loans fund assets and major expenses.

Key Similarity. The primary commonality is that credit builder loans report to credit bureaus under the same name as personal loans.

When are personal loans more appropriate than credit builder loans? Borrowers with thin credit profiles pay high interest on personal loans, in which case credit builder loans are a better choice for non-emergency situations. After builder, personal loans are more appropriate to fund major expenses and household assets.

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#5 Debt Consolidation Loans

Summary. Debt consolidation loans (DCLs) simplify monthly payments and potentially reduce interest charge by combining 2 or more debts into a single installment payment, which constitutes a debt management activity wholly separate from the credit improvement space in which credit builder loans operate. The core commonality is that both DCLs and CBLs are installment credit.

Key Difference. The primary difference is purpose. Debt consolidation focuses on transferring existing balances for to solve issues surrounding transaction volume and high interest, whereas credit builder loans preempt these problems by thickening credit reports.

Key Similarity. Both CBLs and debt consolidation loans are installment debt, not revolving lines.

When are debt consolidation loans more appropriate than credit builder loans? DCLs are more appropriate for borrowers with thick credit files dealing with an uncomfortable number of monthly payments with high-interest debt, whereas CBLs are a better choice for consumers with thin credit regardless of payment an interest issues. A good CBL can lower DCL interest.

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#6 Rent Reporting Services*

* is credit builder product

Summary. Rent reporting services (RRSs) and CBLs are both credit building tools, but rent reporting services report under an independent category dating to 2014, whereas credit builder loans report as installment debt as old as consumer credit. Due in large part to its recency, rent reporting impact is decisively lower than credit builder loans.

Key Difference. The primary difference is that rent reporting services give a small amount of credit for payments borrowers already make, whereas credit builder loans provide use a new account that adds thicker weight to credit reports.

Key Similarity. Both RRSs and CBLs add tradelines to consumer reports that improve overall profiles when paid on time.

When are rent reporting service more appropriate than credit builder loans? Consumer with thin files benefit from using both options at the right time, but rent reporting services are especially useful for those with zero history dealing with the credit building paradox.

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#7 Savings-Secured Loans*

* is credit builder product

Summary. Savings-secured loans (SSLs) are one variation of a specific credit builder loan type called fully-secured. They allow borrowers to take a loan of the same amount as cash held in a savings account, which acts as collateral to keep interest rates low and accept subprime borrowers.

Key Difference. SSLs are fully-secured credit builder loans, but the most common CBL type is payment-secured because it requires no collateral up front. This means what most consumers recognize as credit builder loans differs from SSLs in that the up front collateral is minimal.

Key Similarity. Strictly speaking, savings-secured loans fall under the fully-secured credit builder category.

When are savings-secured loans more appropriate than credit builder loans? Borrowers with comfortable cash reserves but poor credit are ideal candidates for SSLs, or any other fully-secured CBL.

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#8 Secured Loans

Summary. Credit builder loans are a type of secured loan, which refers to any debt agreement that requires cash or another asset be identifies for confiscation in the case of borrower default. That said, the common credit builder loan's design prevents a net loss for borrowers even in the case of cancellation. There is no circumstance in which a borrower should default on CBLs because strong offers allow penalty-free cancellation at almost any time.

Key Difference. CBLs are a type of secured loan, but unlike other secured debt they never result in a net loss for the borrower due to their use of progressive collateral and penalty-free cancellation.

Key Similarity. Credit builder loans are a type of secured loan because they use collateral (savings-based).

When are secured loans more appropriate than credit builder loans? Secured loans are a category of loan defined by the use of collateral, including auto and mortgage loans. The circumstances in which these secured loans are preferable to credit builder loans is self-evident: in the case of car or home purchases. Inversely, credit builder loans work best to improve credit profile and thereby ensure secured loan acceptance and low interest rates.

A detailed comparison is not insightful here because "secured" is simply a way to denote any closed-end debt with collateral.

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#9 Mortgages (+ Cash-Out Refinancing)

Summary. Mortgages are loans used to purchase houses, whereas credit builder focus on improving credit profile to obtain easy acceptance and low rates on mortgage and other loans.

Key Difference. The core difference is purpose. Mortgages or a funding tool important to active homebuyers, whereas credit builder loans help future homebuyers minimize refusal rate and obtain low interest.

Key Similarity. CBLs and mortgages have installments in common, which means they report to credit bureaus under the same account type (though mortgages appear as housing-related).

When are mortgages more appropriate than credit builder loans? Mortgages are more appropriate for homebuying, although credit builder loans can be used in advance to support approval and obtain better rates.

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#10 Auto Loans

Summary. Auto loans and CBLs are both secured installment debt, but auto loans fund the purchase of personal vehicles that doubles as loan collateral whereas CBLs have no physical collateral.

Key Difference. The key difference is auto loans focus on car buying needs, so their terms, rates, and amounts differ dramatically from credit builder loans, whose purpose is strictly related to reporting.

Key Similarity. Though different in purpose and terms, both CBLs and auto loans are installment credit.

When are auto loans more appropriate than credit builder loans? The obvious scenario for auto loans is the purchase of a personal vehicle, whereas a CBL is best to use in advance to ensure approval and low rates.

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Bonus: Credit Builder Accounts*

* is credit builder product

Summary. Credit builder accounts are the underlying register of transactions on credit builder loans, which means they are simultaneously the same and different.

Key Difference. Accounts control the information recorded and reported to credit bureaus and is not the agreement itself. That statement may boarder on the trivial, but it's key to understand how the components of an account can forego borrower expectations such as non-reporting to certain bureaus.

Key Similarity. The account reflects the loans and the two only exist together.

When are credit builder accounts more appropriate than credit builder loans? CBAs never exist separately from CBLs, except insofar as they continue to report after the loan payoff (up to 10 years).

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Citations

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