Discover the benefits and challenges of credit-building cards for improving your credit score. Learn about no credit checks, flexible security deposit, lower barrier to access, no interest rates or fees, and more. Consider the drawbacks such as linked account requirement, confusing terms, no upgrade path, and poor preparation for traditional credit cards.
Questions Answered in this Article
Q: What is a credit-building card? A: A credit-building card is a type of credit card that eliminates the risk of overextension and helps improve credit scores. It comes with no credit checks, security deposits, fees, or interest rates.
Q: What are the benefits of credit-building cards? A: The benefits of credit-building cards include no credit check or security deposit, flexible security deposit, lower barrier to credit access, no interest rate or fees, and bill payments reported to credit bureaus.
Q: What are the drawbacks of credit-building cards? A: The drawbacks of credit-building cards include a linked account requirement, confusing terms, no upgrade path, and poor preparation for traditional credit cards.
Q: How do these cards help build credit scores? A: Credit-building cards help build credit scores by reporting bill payments to the credit bureaus and making it a habit of timely payments.
Q: What are the challenges of these cards? A: The challenges of credit-building cards include a linked account requirement, confusing terms, no upgrade path, and poor preparation for traditional credit cards.
The Benefits and Challenges of Credit-Building Cards for Building Credit
A credit card that eliminates the risk of overextension and improves credit scores? It sounds too good to be true. And to top it off, these cards come with no credit checks, security deposits, fees, or interest rates – a dream come true for those new to credit and those seeking a second chance. However, be aware that these fintech-backed starter cards have both pros and cons and may not be suitable for everyone.
These recent market entrants are easier to obtain and less costly than many other credit cards for low FICO scores (below 629). They offer the following benefits:
- No credit check or traditional security deposit The application process for these cards does not result in a hard inquiry on your credit report that could lower your credit score. Eligibility is based on factors like income, cash flow, or a security deposit, depending on the card.
- Flexible security deposit Unlike traditional secured credit cards, you do not have to make a large upfront deposit of several hundred dollars. Instead, you have the option to choose your own deposit amount, which sets the card’s credit limit and links a bank account to the card. Some cards, like the Tomo Credit Card and Grow Credit Mastercard, do not require a security deposit.
- Lower barrier to credit access According to Edward Sanchez, a registered financial consultant, the flexible security deposit reduces the barrier to accessing credit as it eliminates the need for a large upfront payment.
No Interest Rates or Fees
Most of these cards do not allow you to carry a balance from month to month, so there is usually no annual percentage rate (APR). This means you cannot be charged interest. Your purchasing power is limited to the amount you set in your linked bank account.
These cards also tend to have no annual fee and few other fees. Late fees are often not possible as these cards automatically deduct funds from your linked bank account for transactions.
Edward Sanchez praises the Chime Credit Builder Visa® Credit Card for offering credit-building opportunities without these types of fees, which can accumulate. He says, “Most other credit-building cards targeting people with lower credit or no credit have excessive rates and fees.
Bill Payments Reported to Credit Bureaus
Some or all of the major credit bureaus receive your bill payments based on the credit card you choose. Making a habit of timely payments is an important step towards a good credit score (a FICO score of 690 or higher).
Cons of Credit-Building Cards
Challenges of these cards While these credit-building features are attractive, these cards have some drawbacks:
Linked Account Requirement
You may need to open an account with the card issuer or link an existing bank account through a third party to be eligible for these cards. If you don’t want an extra account or are uncomfortable sharing banking information, this could be a drawback.
It’s worth noting that some card issuers are tech platforms, not official banks. These “neo banks” partner with a bank to issue the card but come with their own disadvantages.
Many of these products work like secured charge cards with limitations, rather than traditional credit cards. Your charging limit is limited, and you can’t carry a balance, making them less flexible.
Terms and features can vary between these cards, so you may need to consult the fintech companies for clarification. Some cards don’t report credit utilization to the bureaus, making it difficult to understand your credit report.
No Upgrade Path
Unlike traditional secured credit cards, most alternative cards don’t offer the option to upgrade to an unsecured card with the same issuer. If you want a better card, you’ll need to switch to a different issuer, potentially affecting your credit utilization and credit history.
Poor Preparation for Traditional Credit Cards
While these cards can help build credit, they may not prepare you for managing a traditional credit card with APR and other fees. If you’re used to automated bill payments, you may have trouble budgeting for traditional credit card expenses.
Using a credit builder card, like Chime’s, may help you qualify for a store credit card, but there could be a learning curve in managing it. For example, understanding the consequences of late payments and added fees.
- Credit-building cards are a type of credit card that eliminates the risk of overextension and helps improve credit scores
- Benefits of credit-building cards: no credit check or security deposit, flexible security deposit, lower barrier to credit access, no interest rate or fees, and bill payments reported to credit bureaus
- Drawbacks of credit-building cards: linked account requirement, confusing terms, no upgrade path, and poor preparation for traditional credit cards
- Credit-building cards help build credit scores by reporting bill payments to credit bureaus and encouraging timely payments
- Challenges of credit-building cards include the linked account requirement, confusing terms, no upgrade path, and poor preparation for traditional credit cards