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Ever wondered how someone with no credit or a very low credit score can qualify for a loan or credit card? It can seem like a catch. You need credit to get a loan, but you can’t get credit without a loan. This is a challenge that many young people starting their careers face, as well as individuals attempting to recover from a financial setback. Thankfully, there are two great tools to help: a credit builder loan and a secured credit card.
These two products are created for the same purpose: to help you build or mend your credit picture. They do it in completely different manners. Recognizing these distinctions is critical to finding the one that is right for your financial life. Let’s unpack what each one is and the pros and cons of each.
What is a Secured Credit Card?
Think of a secured credit card as a regular credit card with a safety net. To acquire one, you contribute a cash deposit to the bank, say ₹10,000. The bank will then issue you a credit card, with the credit limit typically in the amount of your deposit. So, perhaps your limit is ₹10,000.
You use this card the same way you would use any other credit card to make purchases. The money you are betting with will not be your deposit. It’s a loan from the bank. You have to pay back the money every month. Your payments are reported to the credit bureaus by the bank, such as CIBIL. You can raise your score by using your credit card wisely and paying your bills on time. Your credit score will go down if you don’t keep the deposit full.
- Pros of a Secured Credit Card:
- Simple Access to Funds: You can immediately use the funds on the card to make purchases. This is fine if you are trying to purchase things for everyday life.
- Helps You Build Credit: Every time you use the card and pay your bill on time, you’re building a positive payment history, which is a big part of your credit score.
- Can Become a Regular Card: After you prove yourself competent with it for 6 to 12 months, the bank may allow you to convert it to a regular, unsecured credit card. They will also return your deposit.
- Disadvantages of a Secured Credit Card:
- Requires a Deposit: You need to have cash to lay down as a deposit to get the card. If you don’t have any extra money saved, this can be a complete financial disaster.
- Risk of Debt: As it’s a credit card, you could potentially overspend and find yourself with a balance that is hard to pay down.
- High Interest Rates: Secured credit cards can charge high interest rates if you don’t pay your full bill every month.
What is a Credit Builder Loan?
A credit builder loan in India is a type of loan that turns the whole process upside down. With a normal loan, you get the money first. With this loan, you don’t.
The lender doesn’t give you the money right away after giving you a small loan, say a ₹15,000 debt. Instead, they put it into a special savings account or a Fixed Deposit (FD). You can’t touch this money. After that, you make payments every month, just like with a normal loan. The lender will also tell credit bureaus about your on-time payments. Once you have repaid the loan in full, the lender releases the savings account to you, minus any fees and interest.
- Pros of a Credit Builder Loan:
- No Deposit Required: As long as you pay a fee, they will lend you money based on your profile. All you need is the funds to cover the monthly installments.
- Builds Savings and Credit at the Same Time: This is a fantastic way to build both your credit score and a savings habit. At the end of the term, you receive a lump sum of money that you can use as you wish.
- Reduced Risk of Debt: You don’t receive the money in a lump sum up front, so there’s no chance of accidentally spending it or falling into debt. This can help you stay focused on your mission to build credit.
- Builds Your Credit Mix: A Credit Builder Loan in India is an installment loan. That way, they say, you have such a loan on your credit report along with a credit card, and that shows potential lenders that you’re able to manage different types of credit, which can help your score as well.
- Cons of a Credit Builder Loan:
- You Pay Interest: You still have to pay interest on the loan even though you don’t get it right away. The money you get back at the end will be less than what you paid in total.
- Not Immediately Accessible Funds: You won’t be able to get the money right away. This loan is not for emergencies; it’s to help you build credit and save money.
Which One Should You Choose?
The best choice for you depends on your needs.
- Choose a secured credit card if:
- You’ve saved some money for a down payment
- You need to use credit for everyday spending and want immediate access to funds.
- You are confident that you can manage your spending and pay your bills in full every month.
- You want a chance to get a regular credit card soon.
- Choose a Credit Builder Loan India if:
- You don’t have cash for a deposit.
- You want to focus only on building credit and don’t need money right away.
- You want to build a savings habit at the same time.
- You want to avoid the risk of overspending on a card.
Many people even use both! They might get a secured credit card for daily use and a credit builder loan in India to show they can handle both types of credit. This can help improve their credit score much faster. Companies like Stashfin have many different kinds of loans and financial products to help you, no matter where you are in your financial journey. The key is to be responsible with both and make your payments on time.
FAQs
Q1. What is the minimum credit score for a credit builder loan?
Credit builder loans are made for people with no credit history or a low credit score. So, there is usually no minimum credit score required to get one.
Q2. How long does it take to build a good credit score?
Building a good credit score takes time and discipline. With on-time payments, you can start to see a good increase in your score in about 6 to 12 months.