Credit builder loans are installment debt designed to improve consumer credit, whereas credit cards are revolving lines for everyday purchases. Both appear on consumer credit reports and impact creditworthiness ratings, but the have few other similarities.

This credit-builder comparison highlights each product's pros & cons so consumers can choose the best option for their situation. After all, there is an appropriate time for each in our financial lives.

To be clear, CBLs and CCs are not the same as credit builder cards, which provide no-deposit revolving credit to subprime borrowers.

Key Takeaway for Consumer

At their core, credit cards provide small short-term debt for everyday spending that offer cash rewards and only charge interest when unpaid.

Credit builder loans, on the other hand, focus on building credit to minimize interest and maximize rewards on credit cards and other mainstream financial products.

Which is better for building credit?

Credit builder loans are better because they're designed for borrowers in the "building" phase, which means they have lighter eligibility criteria, penalty-free cancellation, and minimal cash requirements.

Credit cards can be more effective for borrowers with healthy credit who want to go above and beyond to secure the absolute best interest rates from lenders.

Which is riskier?

Credit builder loans are generally less risky than credit cards because of their simplicity. Credit cards can be complex and nuanced, leading compounding debt, whereas credit builder loans use something called "savings-based collateral" to prevent actual accumulation of debt.

In other words, experienced and disciplined borrowers can get more from credit cards, but most Americans are better off building with a loan designed for the credit building journey.

Key Difference

The marked difference is that credit builder loans do not fund the purchase of everyday goods and instead focus on improving creditworthiness to obtain credit cards with low rates and high cash rewards.

Key Similarity

Credit cards and credit builder loans both establish tradelines on credit reports and impact three credit factors: payment history, credit mix, and account age.

Properties Compared

CBLs and credit cards share properties in 4 areas, called consumer highlights, specifications, lender conditions, and credit reporting. Our approach uses these optics to compare and contrast.

Consumer Highlights

Specifications

Lender Conditions

Credit Reporting

#1 Purpose

Summary. Credit cards focus on funding everyday purchases, whereas credit builder loans focus on creating a profile that lenders trust and reward with cash back and low-rate credit cards.

Similarities. Both credit cards and credit builder loans aim to help consumers with purchases made on credit.

Differences. CBLs are credit improvement tools designed for use before applying for and using credit cards, whose purpose is to finance purchases with short-term debt that's interest free unless unpaid.

Exceptions. Some credit cards qualify as credit building products (called credit builder cards) because they accept subprime borrowers without requiring deposit. We know at least 5 in the market as of writing.

#2 Uses

Summary. The primary use for credit cards is purchases, followed by cash advances and balance transfers, whereas the credit builder loan use-case is nourishing payment-history, credit mix, and account age (with the exception of unsecured CBLs, discussed below).

Similarities. There are no usage similarities between credit cards and credit builder loans.

Differences. Consumers leverage CBLs to lift their profile into acceptable territory and to obtain lower rates, which makes them a credit management tool. Credit cards are more operational than CBLs and allow consumers to purchase goods and services before they have cash in hand, and protect themselves against fraud at the same time.

Exceptions. Unsecured credit builder loans provide cash upfront like conventional personal loans, which can be used to finance major expenses such as moving expenses, medical bills, and vacations.

#3 Target Borrower

Summary. Credit card users (also known as cardholders) have strong credit profiles, whereas typical credit builder loan borrowers have thin credit that needs building to obtain good cards.

Similarities. Credit cardholders can benefit from credit builder loans when preparing for a large purchase, or to move into a higher tier of credit card offers.

Differences. For the most part, CBLs target customers with a specific credit score or profile goal whereas credit cards target any consumer who wants fraud protection and rewards.

Exceptions. A small number of credit cards target consumers building their credit, and these offers double as credit builder cards.

#4 Popularity

Summary. Excluding mortgages, credit cards constitute approximately 13% of total consumer debt, whereas credit builder loans represent approximately 1%.

Similarities. Both products occupy minor portions of total debt, behind home, auto, and student loans.

Differences. Though minor in absolute value, approximately 40% of Americans¹ have at least 1 credit card, whereas credit builder loans have a smaller penetration rate.

Exceptions. There are no exceptions to popularity differences between CBLs and CCs.

#5 Amount

Summary. The average credit card limit was $6,263 and the median balance was $3,090 in 2022 dollars, whereas the average CBL principal is just over $3,000².

Similarities. Common values for credit cards and CBLs range in the 1000s.

Differences. The median credit credit card balance (~$3,000) is approximately 50% higher than the average CBL balance (~$2,000), which confirms consumers stand to benefit from credit mix provided by CBLs for daily spending.

Exceptions. The CBL figures above describe the most common type (called payment-secured), but unsecured and fully-secured options.

#6 Term

Summary. Credit cards do not have terms because they are revolving credit, but the most common credit builder loan terms are 12, 24, 36, and 60 months².

Similarities. There are no similarities between CBL and credit card term lengths.

Differences. Like all open-ended debt, credit cards provide a sum of credit borrowers can use and repay on a periodic basis, usually monthly. Like all closed-end credit, CBLs have fixed durations whose most common variations are 12, 24, 36, and 60 months (1 — 5 years, but rarely 4).

Exceptions. Some credit cards like Upgrade have gotten creative and provide fixed-term installments plans on purchases, but this is a loan structure integrated into a card structure.

#7 Interest & APR

Summary. At 6% — 14%², CBL rates are lower than the historical average 15% credit card APR that's flexing above 20% in 2022 and 2023.

Similarities. CBL interest and credit card APR usually hover at ranges below 20%.

Differences. CBL interest is decidedly lower than credit card APR on average. Moreover, the calculations on loan debt and revolving lines is not the same. Credit cards only charge interest when the full balance goes unpaid or the cardholder uses cash advances or balance transfers, and they use a sophisticated calculation called average daily balance.

CBLs, however, compute interest at the monthly rate (annual rate / 12) on the outstanding balance. This method always incurs interest but is more straightforward.

Exceptions. Some CBLs offer zero-interest options, and it is always possible to pay zero interest on credit cards.

#8 Collateral

Summary. Credit builder loans use savings-based collateral that borrowers pay into an account with each installment, whereas credit cards have no collateral.

Similarities. There are no similarities between credit card and CBL collateral.

Differences. The loan structure on credit builder loans requires the borrower make monthly payments that are held in a savings account to secure the loan principal, which the lender disburses at the end of the term. Credit cards do not use collateral at all, although a subcategory called secured credit cards requires a deposit.

Exceptions. Unsecured credit builder loans do not require collateral.

#9 Lender Types

Summary. CBL and credit card lenders include banks, credit unions, and online lenders.

Similarities. All three lender types provide CCs and credit builder loans.

Differences. The difference is that credit cards (like most consumer financial products) are available through a much larger number of providers, whereas the best credit builder loans are most common via online lenders (except when geographical constraints influence offers).

Exceptions. There are no exceptions to lender types for these products.

#10 Lender Opinion

Summary. Lenders interpret credit builder debt as secured personal loans and flag them as installment credit, whereas they interpret credit cards as revolving lines. Both products impact credit factors.

Similarities. Each product adds a tradeline to consumer credit reports that lenders use to evaluate creditworthiness.

Differences. The difference is that credit cards are revolving account types, whereas CBLs are secured installment debt. Lenders use both to evaluate borrower creditworthiness.

Exceptions. There are no exceptions. Even credit cards that allow buy now, pay later installment lines such as Apple Card's Apple Card Monthly Installments (ACMI) reports as a non-delinquent revolving balance that lowers over time.

#11 Impact on Credit

Summary. Credit cards and CBLs both impact payment history, credit mix, and account age, but CCs also influence card utilization rates. The combination of revolving accounts from CCs (or alternatives) and installment accounts from CBLs has the greatest potential benefit.

Similarities. Payment history, credit mix, and account age credit factors are influenced by both products.

Differences. Credit cards impact credit utilization, but CBLs do not.

Exceptions. One way to think about impact on credit is that the combination of both account types used the right way, at the right time, has the greatest benefit to credit profile.

Summary

Altogether, the relationship between these products is that credit builder loans are a tool consumers use to improve their profile to get the best rates and rewards are credit cards (and all other debt).

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