Credit Builder Loans vs. Secured Credit Cards

Published: 19 October 2023
Updated: 15 February 2024

Author: Noah Gomez

A thorough comparison of credit builder loans (CBLs) to secured credit cards (SCCs) helps borrowers understand each product's strengths and weaknesses. This clarity helps them evaluate when credit builder loans are the better choice for their circumstances.

credit builder loans vs secured credit cards

Credit builder loans and secured credit cards are both credit building products that use cash collateral to accept consumers with thin credit.

The key difference is that secured cards are revolving credit that require the borrower front the full deposit without a guaranteed refund and above-average costs, whereas credit builder loans allow progressive collateral with each installment at accessible interest rates.

Lenders control the secured card deposit, and many notoriously never refunding it. Lenders do not, however, control savings build via CBLs. Except in extreme cases of borrower default, the lender must refund collateral on credit builder loans.

Key Takeaway for Consumers

Secured credit cards require an upfront deposit and impose above-average interest rates, whereas credit builder loans turn installment payments into cash collateral in order to provide below-average rates.

Secured card deposits are not always refunded because the account has no end date and lenders can use "discretion" to decide when the card should graduate, whereas cash deposited for credit-builder loans must be paid out after loan end.

Which is better for building credit?

Secured credit cards are becoming outdated because a new breed of payment cards give you the same benefits without requiring a deposit, but there's no alternative to credit builder loans. From where we sit, this means credit builder loans are better than secured credit cards.

That said, it's important to get a mix of loans and cards to build a healthy profile that stands the test of time.

The following questions are useful to ask yourself as a gut-check before signing:

  • Secured cards: "Do I want to deposit money with a risk of no refund to use a high-interest card?
  • Credit builder loans: "Do I feel comfortable with monthly payments I will get back upon maturity?"

Key Difference

The key difference between secured credit cards and credit builders is their use of collateral. Secured cards require the full amount up front while CBLs use payments that double as collateral, paid over time.

Moreover, CBL collateral helps lenders decrease interest rates, which is not true for SCC. Finally, though they both use cash-collateral, secured cards are revolving credit while CBLs are installment credit.

Key Similarity

The key commonality is that both secured credit cards and credit builder loans are cash-collateralized, which means the borrower must either deposit money to secure the debt or forego receiving principal until doing so.

Properties Compared

CBLs and SCCs share properties in 4 areas. They are consumer highlights, loan specifications, lender conditions, and credit reporting. Our approach uses these four lenses for comparison.

Consumer Highlights

  • Purpose
  • Uses
  • Target Borrower
  • Popularity


  • Amount
  • Term
  • Interest & APR
  • Collateral

Lender Conditions

  • Lender Types
  • Lender Opinion

Credit Reporting

  • Impact on Credit

#1 Purpose

Summary. Both CBLs and SCCs both focus credit building, but CBLs add installment credit to reports whereas secured credit cards add revolving credit.

. Both use collateral to accept poor credit borrowers and provide a means to improve consumer credit reports.

. Secured credit cards report revolving account types, whereas credit builder loans build installment history.

. There are no exceptions to purpose.

#2 Uses

Summary. Secured credit cards can be used to make everyday purchases, withdraw cash, and in some cases transfer balances, whereas the most common CBL type cannot be used to fund purchases.

. The only usage similarity is that SCCs and CBLs build credit profiles.

. Credit builder loans have no purchasing value because they're structured to distribute loan principal at the end of the loan (see image below), whereas secured credit cards are purchasing tools.

. The unsecured CBL type provides funds up front that borrowers can use to fund a major expense or the purchase of an asset (other than a home or car).


#3 Target Borrower

Summary. Both CBLs and SCCs target borrowers with limited, zero, or damaged credit history, but SCCs focus on borrowers with cash available for the upfront deposit.

. Borrowers in focus are credit invisibles with no history, those with a small number of accounts who struggle to improve their score, and consumers with charge-offs, collections, or late payments.

. Because secured credit cards require an upfront deposit, they target borrowers with sufficient cash to not only secure the card up front but also make monthly payments on the revolving line.

. There are no exceptions to target borrowers.

#4 Popularity

SummaryCardholder data from the consumer financial protection bureau and macroeconomic debt data from the federal reserve suggest the number of SCC and CBL offers both number in the hundreds, but the popularity of payment cards over personal loans makes consumer SCC adoption much higher.

. There are approximately 160 secured credit card offers in the market, and between 200 and 750 credit builder loans, which means both number in the hundreds.

. Though offer size is similar, consumers have a strong preference for secured cards and adoption rates are higher.

. There are no exceptions to these figures.

#5 Amount

Summary. SCC credit limits are not public, but a common range is $200 - $500, whereas the average CBL principal is just over $3,000.

. In principle, both secured cards and credit builders have uncapped maximum amounts—as long as the borrower can provide collateral for them. Most lenders impose maximums, but it is certainly possible to have a secured card credit limit equal to a credit builder loan principal.

. Secured card limits usually range in the hundreds, whereas CBL amounts range in the thousands.

. Fully-secured credit builder loans have unlimited amounts, given that the borrower provide collateral to secure it up front.

#6 Term

Summary. Secured credit cards do not have finite terms because they are open-end revolving credit, whereas credit builder loans are closed-end structures whose most frequent terms are 12, 24, 36, and 60 months.

. There are no similarities in CBL and SCC terms.

. SCCs do not have fixed terms, whereas credit builder loans usually last 12 months.

. One way to interpret secured credit card term is the time it takes for the card to graduate from secured to unsecured, which usually takes between 6 and 12 months.

#7 Interest & APR

Summary. At 6% — 14%, credit builder loan rates are significantly lower than the average 18.17% APR, but the interest expense calculation is not a direct comparison and it is possible to use secured cards without paying interest.

. The average interest and APR are CBLs and secured cards is under 20%, making them mainstream and not predatory tools whose APRs breach the 35.99% golden ceiling.

. Loan interest is calculated using the monthly rate multiplied by the outstanding balance, where the periodic rate is the annual rate divided by 12 (month in a year), whereas credit card interest charge is a multi-step calculation based on average balances that varies by transaction type (purchases, cash advances, balance transfers).

. The only exception to staunch differences in CBL vs SCC interest charge is instances of 0% APR and interest options because in both cases interest is zero. We do not know of any 0% SCCs or CBLs that don't simultaneously charge deceptive admin or membership fees.

#8 Collateral

Summary. Secured credit cards require the full collateral be deposited before use, whereas credit builder loans use a progressive structure in which the borrower makes installment payments that double as collateral.

. Both structures require collateral as either security deposit or cash in a secured account (savings or certificate of deposit).

. Secured card collateral is a security deposit that doubles as the card's credit limit. The lender controls the refund. The most common credit builder loan uses a payment-secured structure in which the borrower agrees to lock installment payments in savings until the loan is paid in full, at which point the principal is distributed.

Unsecured credit builder loans do not require collateral.

#9 Lender Types

Summary. Secured credit cards and credit builder loans are both available through banks, credit unions, and digital lenders, but the best credit builders come from digital lenders.

. Banks, credit unions, and online lenders offer SCCs and CBLs.

. Secured credit card offers are equally available across lender types, but credit builders with the best terms and interfaces come from online lenders.

. There are no exceptions to lender types.

#10 Lender Opinion

Summary. Lenders tend to trust secured credit cards because of their popularity, and they see credit builder loans as secured personal loans.

. Lenders view these products as secured debt and responsible management of each signals borrower creditworthiness.

. Lenders recognize secured cards as revolving types and credit builder loans as installment types.

. Lenders tend to trust a mix of revolving and installment debt more favorably than a single type.

#11 Impact on Credit

Summary. Responsible management of both products positively impacts payment history, credit mix, and account age, and the exact impact varies across profile diversity and thickness.

. SCCs and CBLs impact the same three credit factors: payment history, credit mix, and account age.

. CBLs benefit thin profiles with a smaller amount installment credit, whereas SCCs benefit thin files with smaller amounts of revolving credit.

. There are no exceptions to credit impact.


Secured cards and credit builder loans 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.

Presented with this information, most consumers shy away from secured cards. The trouble with this approach is that credit mix is an important credit factor. A solution is for lenders to leverage credit builder loans and emerging no-deposit credit builder card offers.


  1. “Credit Card Agreement Dataset.” n.d. Accessed February 15, 2024.
  2. Gomez, Noah. 2023. Review of Credit Builder Loan Offers Dataset. Thick Credit. July 24, 2023.

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About the Author

Noah Gomez (founder of Thick Credit) is a transatlantic professional and entrepreneur with 3+ years experience in consumer finance education. He also has 5+ years of experience in corporate finance, including debt financing, M&A, listing preparation, US GAAP and IFRS.

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