Building Credit With Credit Builder Cards vs Secured Credit Cards
Once you have bad credit it can be hard to get back on track and in good standing. And the reason for your low score doesn’t matter.
“When I was 18 I got a credit card … and I didn't understand how it worked,” says Khash B., a mechanic in Mission Viejo, California. “It tanked my credit score.” Now, even though he has a good income, Khash was struggling to buy a house or car because of his low score.
Traditionally, if you wanted to use a credit card to rebuild your credit, you might be stuck choosing from options with higher interest rates and fees. However, newer credit builder cards are changing the rules.
What are credit builder credit cards?
Credit builder cards are specifically created to help people establish and improve their credit scores. The name refers to the intention rather than a type of credit account.
Generally, it’s difficult to qualify for a credit card if you have a bad credit history and don’t already have a good credit score. But credit builder cards often have alternative requirements, such as a security deposit or responsible banking history.
Credit builder card companies may also offer additional perks or features to help cardholders understand and improve their credit.
For example, the Ava Card’s Spend Power suggestion can help you optimize your credit utilization ratio for credit building. “I tried it out,” says Khash. “It’s been one of the best things I’ve done … I got my wife onto it.”
Unsecured vs. secured credit cards
You can more broadly classify credit cards as unsecured or secured.
- Unsecured credit cards are standard credit cards. Most travel, rewards, and retail credit cards are unsecured credit cards. You generally need a good credit score to qualify for an unsecured card, and your credit score affects your credit limit.
- Secured credit cards are for people who have trouble qualifying for an unsecured card. You have to send the credit card issuer a refundable security deposit to open your account. The deposit amount may determine your credit limit, and the issuer can use it to offset losses if you don’t pay your credit card bill.
Both types of cards work the same once they’re open—the security deposit is the main difference. But it can also be a big barrier. You might have to lock up at least several hundred dollars, or much more if you want a higher credit limit.
Some secured credit builder cards let you actively manage your security deposit balance in a linked bank account. With others, you won’t get the security deposit back until you close the account or the issuer upgrades you to an unsecured card.
Are credit builder cards secured or unsecured?
You could classify every secured card as a credit builder card. Some, but not all, unsecured cards are also credit builder cards.
In either case, many credit builder cards have high interest rates and fees. Some even have fees you don’t usually find on other cards—such as a fee to open your account or increase your credit limit. They might also have few, if any, benefits.
Compare the Ava card to traditional secured and unsecured credit cards
Several secured and unsecured credit builder cards don’t charge annual fees and offer good benefits. Some credit card companies even have a cash back rewards program. However, those card offers can lead to overspending, which might hurt your credit scores. And the cards also might have high interest rates.
The Ava card takes a completely different approach—a flat-rate subscription rather than interest charges and fees. “I’ve used a bunch of different credit building and credit helping apps,” says Khash. “None of it has helped me as much as Ava has.”
How credit cards affect your credit scores
There’s no difference between secured and unsecured credit cards when it comes to building credit. Every credit card that’s reported to the major credit bureaus (Equifax, Experian, and TransUnion) and winds up in your credit report can either help or hurt your credit scores depending on how you use it. It’s important to understand how credit cards work.
The main two ways that credit cards affect your credit scores are:
- Payment history: Making at least your minimum monthly payments on time helps your credit—missing a due date hurts it. Technically, late payments won’t hurt your credit unless you’re at least 30 days late. But card issuers can charge late payment fees, take away rewards, and change your interest rate if you’re just one day late.
- Credit utilization: Using a small portion of your credit limit is best for your scores, which can be difficult if your card has a low credit limit. You don’t need to carry a credit card balance—that’s a costly myth—but you do want to use your credit card each month to show that it’s an active account.
Other factors can affect your scores as well, such as the age of your accounts, the types of accounts you have open, and whether you’ve recently applied for credit. But on-time payments and recent utilization are generally more important.
Choosing the right option
You might consider different secured and unsecured credit builder cards to establish or improve your credit scores. And the right options will depend on your goals and how you plan to use the card.
The best secured credit cards and unsecured credit builder cards can be good options if you want a card for day-to-day purchases. Responsibly using a credit card can be safer and more convenient than a debit card. And, even if it has a high interest rate, you can avoid interest charges if you pay your bill in full each month.
However, it can be easier to manage your credit building goals if you don’t use your credit builder card for day-to-day expenses.
Khash and his wife use unsecured Ava credit builder cards to pay for their subscriptions and then pay the bill in full each month to establish a positive payment history and low credit utilization ratio. “I can now buy my wife a reliable, brand-new car that she can safely drive my daughter around in,” says Khash.
