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Credit Builder Loan vs Secured Credit Card: Which to Choose?

Karen Stevens

Aug 08, 2022 8 min read

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Good credit is a big part of a solid financial foundation. Building up and maintaining that high credit score takes time. You need to make consistent payments on your debts and loans. You can choose between myriad credit products and loans when you already have good credit. However, when you have poor credit, your options are more limited. 

If your credit score needs a boost – whether because you’re just starting out, you’re a newcomer to Canada, or you previously filed for bankruptcy – consider a secured credit card or credit builder loan. Both these options are open to those with lower credit scores and can help build a good credit profile. However, they differ in the details. Your choice will depend on factors such as how much collateral you have available and how quickly you need the money. Read on to learn more and find a solution that fits your unique situation. 

What is a Secured Credit Card?

A secured credit card works like a traditional or unsecured credit card in every way. The only difference is that you’re required to make a security deposit when you open a secured credit card. The lender holds onto your deposit to use to pay off your balance if you stop making your payments in the future. People with bad credit or no credit history often use secured credit cards to build a positive payment history.

These cards are tailored to people with low credit scores, so you won’t be rejected because of your credit score. However, it's essential to compare different offers before you apply. Some secured credit cards may charge an annual fee, they may charge other fees such as ATM withdrawals, and sometimes they have high interest charges. You should also ensure that you can meet the minimum deposit requirements, which can vary from card to card.

Once you get approved and start using your card, make sure that you watch the credit utilization ratio. A credit utilization ratio is a number that represents how much of your available credit you are using at any given time. To calculate your credit utilization ratio, simply divide your total current credit card balances by your total available credit. For example, if you have a limit of $5,000 and a balance of $1,000, your credit utilization ratio would be 20%.

A high credit utilization ratio can be detrimental to your credit score because it signals to lenders that you may be overextended and at a higher risk of defaulting on your debts. As a general rule of thumb, you should aim to keep your credit utilization ratio below 30%. However, the lower your ratio is, the better it is for your credit score. An easy way to lower your credit utilization ratio is to pay down your credit card balances so that you owe less in relation to your total available credit. 

traditional unsecured cards

How Does it Build Credit?

Your secured credit card will require you to deposit money into an account as collateral. The deposit usually serves as your credit limit, meaning that's the maximum amount you can spend with the card. This limit means you can’t spend more than you have available, which helps you build up a history of making your payments on time. 

Most secured credit card issuers will report your payment history to the major credit bureaus (Equifax Canada and TransUnion) just like a regular credit card; then, this history will show up on your credit reports. However, it is worth double checking that your card issuer does report to the credit bureaus, as not all of them do.

A secured credit card can be a good option if you're looking to improve your credit score. Just make sure you use it responsibly: make all your payments on time and avoid carrying a balance from month to month to avoid damaging your credit.

Pros and Cons of Secured Credit Cards

Consider the benefits and drawbacks of secured credit cards to discover whether they are the right financial product for you.


The pros of a secured credit card include the following:

  • Lower annual fees: Secured cards often have lower annual fees than unsecured cards and may offer an interest-free grace period, making them more affordable options. 

  • Earn rewards: Depending on your chosen card, it may offer a rewards program where you can earn points or get cash back on your purchases. While these rewards aren’t on the same level as those you’d get with an unsecured credit card, it’s nice to get something back. 

  • Educational tools: Some cards even come with free financial educational materials so you can read up on how to get your finances back on track. 


Secured credit cards come with their own unique drawbacks, such as:

  • Security deposit: Secured credit cards require a security deposit, so they may not be an option for someone who doesn’t have spare cash on hand. A person in this situation might be better off looking for an unsecured personal loan. The interest rates are likely higher, but they won’t have to put down any collateral to access the cash. 

  • Limited credit available: Your credit limit will usually be equal to or slightly higher than your security deposit, so if you plan on making large purchases or have an emergency expense, you may need to look into other options. 

  • High fees: Some secured cards charge high fees, so be sure to read the fine print before applying. 

credit utilization low

What Is a Credit-Builder Loan?

A credit builder loan is a type of loan that helps you build credit and save money. Unlike a traditional loan where you can use your loan immediately, with this type of loan, the lender puts the total loan amount into a savings account. You then make payments to the lender for anywhere from six to 60 months, depending on the lender and loan amount. 

Unlike a traditional cash loan, you don’t receive any money upon approval. As you make payments, they are reported to the credit bureaus. At the end of the term of your credit builder loan, a lump sum will be deposited into your bank account, so it can be useful to think of a credit builder loan more like a savings program than a typical loan.

Credit builder loans can also help you save money on interest and fees and provide a way to build up a financial safety net.

How Does it Build Credit?

The way that you build up credit with a credit builder loan is similar to a secured credit card in that your on-time payments get reported to credit bureaus and build up your credit score over time. 

The longer the loan term, the better, as that allows you more time to demonstrate that you are a reliable borrower. 

What are the Pros and Cons of a Credit Builder Loan?

A credit builder loan can be an excellent option to improve your credit score and save money on interest and fees. However, it's important to consider the potential drawbacks before taking out a loan. If you're unsure if a credit builder loan is right for you, speak to a financial advisor to get expert advice.


There are several benefits of taking out a credit builder loan, including:

  • Improves credit score: By making your payments on time and in full, you can improve your credit score over time. This can give you access to better interest rates and terms in the future.

  • Builds up savings: Many credit builder loans allow you to make payments into a savings account. Over time, this account can provide you with a financial safety net in a financial emergency.

  • Flexible repayment terms: Credit builder loans often have flexible repayment terms, so you can choose a plan that fits your budget. This can make it easier to stay on track with your payments and improve your credit score over time.


There are some potential drawbacks to taking out a credit builder loan, including:

  • It can take time to see results: Because your payments are reported to the credit bureaus over a period of time, it can take several months to see an improvement in your credit score. A credit builder loan may not be the best option if you need immediate results.

credit builder loans work

How Does it Build Credit?

By making on-time payments, borrowers can use a credit-building loan to show that they're responsible and capable of repaying debts. This can help them qualify for better rates and terms on future loans, such as mortgages, and better credit cards. 

What is the Main Difference?

Both products can help people build their credit, but they work in different ways. A credit builder loan is a type of loan specifically designed to help people build their credit and savings over a long period of time. In the alternative, since a secured credit card is backed by a security deposit, which can be used as collateral if the cardholder defaults on their payments, you can use it immediately to make purchases. 

A credit builder loan is more like having a controlled savings plan that helps you build up credit, while an unsecured credit card gives you immediate access to credit, with a few restrictions. 

Which Option Should You Choose?

Both credit builder loans and secured credit cards are good options for people trying to build their credit from scratch or who have bad credit and need to start fresh.

If you need to access some credit immediately, then an unsecured credit card is your best bet. For example, you might need a credit card to make an online purchase or rent a car. On the other hand, the money from your credit builder loan will only become available at the end of the term, which is likely six months or more into the future. So a credit builder loan is more suitable for those who want to focus on saving money while they build up their score. 

unsecured credit cards

The Bottom Line

Both secured credit cards and credit builder loans are excellent ways to work on improving or establishing a good credit score. Of course, it’s possible to use both an unsecured credit card and a credit builder loan simultaneously as a strategy to build up your credit. However, you must be cautious when you sign up for credit products. If you miss or don’t make payments in full, you risk damaging your credit score. 

Whatever your situation, speaking to qualified financial professionals and thoroughly researching your options means that you’re more likely to find something that’s the right fit. 

Karen Stevens
Karen Stevens
Personal Finance Writer

Karen Stevens is a personal finance and business writer with experience across industries from travel to tech. She believes personal finance should be accessible to everyone, and is always on the hunt for that next money-saving hack.

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