A credit score has a profound impact on an individual’s finances. If you lack a credit history or have a poor rating, this could affect your ability to get approved for loans or could get you poor terms such as high interest rates and fees.
Taking steps to improve your credit score puts you in a better position to get loan approvals. One of the smart ways to achieve this is by applying for credit builder cards. Fortunately, you don’t have to visit a physical bank with the influx of digital banks in the market today.
Also known as challenger banks, digital banks are a new frontier in the financial services space. They are providing branchless banking and mobile-first services for customers that prefer to do online banking. They are also well suited for most Millenials and Gen Z’ers who don’t have a good credit score.
So what is a credit builder card, and which digital banks offer the best credit builder cards? Let’s take a closer look.
The Best Credit Builder Cards By Digital Banks
The digital banking industry is offering financial services alternatives to customers. They are easy to access and provide financial products via the bank’s website or mobile app.
Here are some of the best credit builder cards by digital banks.
- Chime Credit Builder Visa Credit Card
Chime Bank is a financial technology company that provides products such as credit builder visa card. With this secured credit card, customers can improve their score by an average of 30 points. Launched in 2020, this card works like a regular debit card by allowing users to only spend the cash in the accounts.
With the Chime Credit Builder Visa Credit Card, users can transfer money from one account to the Credit Builder Secured Account. This card is accepted while making purchases like groceries, gas, and subscriptions.
At the end of each month, the bank reports the credit payments made to credit bureaus such as TransUnion, Experian, and Equifax. This way, you can build your credit over time.
Compared to other secured credit cards, this credit builder card appeals to borrowers because of the lack of fees. You don’t need to pay an annual fee or interest, you won’t need a credit check to apply, and there’s no minimum security required.
- Discover Secured Credit Card
This credit builder card is by Discover bank. This card is ideal if you have no credit history or have a poor credit score. Since it’s a secured card, it requires you to pay a refundable cash deposit to get started. This card doesn’t charge any annual fees and doesn’t have hidden costs.
The card is appealing to most people because of its reward system. You’ll also earn 2% cashback at any restaurant or gas station on up to $1,000 in combined purchases each quarter.
In addition, users get 1% back on all other purchases. Discover bank also matches all the rewards you earn at the end of your first account year.
Once you sign up for this credit card, they have a variable APR of 22.99%. This bank also offers other benefits such as a free monthly look at your credit score and no late fee on your first late payment. Discover starts reviews at eight months; therefore, if you keep up with your monthly payments, the bank can return your deposit and offer you the unsecured credit alternative.
- Capital One Secured Mastercard
A credit builder card from Capital One is essential if you would like to improve your credit score and boost your chances of accessing credit in the future. With this credit card from Capital One bank, you get a limit of $200 with a refundable deposit of $49, $99, or $200. After six months, the bank will start considering you for a higher credit line if you pay your bills on time.
This card doesn’t have annual fees, and you can monitor your credit score with CreditWise for free.
- Petal 2 Cash Back, No Fees Visa Credit Card
This credit builder card is one of the most advanced alternatives. It doesn’t have any fees; therefore, well suited to build your credit rating.
Designed for Gen Z consumers, this card doesn’t require any credit history and has a credit limit of $500 – $10,000. The financial provider also offers a variable APR of 12.99% – 26.99% based on creditworthiness. This card is also primarily for credit newcomers; therefore, you can’t transfer existing balances onto it.
The Petal 2 card appeals to new-generation consumers who want to build a reputable financial history. Immediately you sign up, you’ll get 1% cashback right away and up to 1.5% when you pay on time. These rewards can be redeemed at any time and don’t have a limit or expiry date.
Petal 2 reports to the main credit bureaus to improve your credit rating if you make on-time payments and follow responsible spending habits.
To apply for this credit builder card from Petal, you’ll need to submit a pre-approval request which grants the company permission to evaluate your eligibility for Petal credit cards. To apply for any credit offers, you have to submit a complete application for review. The pre-approval submission will help you determine whether you are eligible for a credit card without affecting your credit score.
- Avant Credit Builder Card
Avant launched its credit card in 2017 for customers with little or poor credit. With responsible use, this card is meant to help rebuild the credit score. Avant provides its customers with a fast and easy application process and 24/7 payments through an online portal.
The company also has zero fraud liability for unauthorized charges and periodically reviews the account as the credit line improves. The credit card has zero hidden fees and doesn’t need a deposit.
The annual fee varies from $0-$59 with a credit limit of $300-$1000. The variable APR ranges from 24.99%-29.99%, depending on the credit history. Unlike other credit cards, this one doesn’t come with rewards and cash backs. It doesn’t allow balance transfers from other credit cards.
Before applying for a credit card, you can also check from their website whether you pre-qualify without affecting your credit score.
- OpenSky Secured Visa Credit Card
Applying for this credit card doesn’t require a credit report. You can get approved for this card even if you don’t have a credit score.
With this card, anyone can apply, and it has an annual fee of $35. You don’t need a bank account, and the bank reports to the three major credit bureaus to improve your score.
The variable APR for this credit card is 17.39%. This rate is relatively low for an individual with a bad credit rating.
The initial deposit required is $200 to $3,000 and is usually equal to your credit limit.
What is a Credit Builder Card?
A credit builder card helps build the credit history of an individual. It works by either building it up from scratch or getting it back on track. These cards are essential, especially if at one point you have found it challenging to get a credit card.
This credit card builder should be utilized responsibly by ensuring that you pay the minimum amount every month and spending within your set limit. This way, you can rebuild your creditworthiness by creating a positive record of money management.
Who Needs a Credit Builder Card?
It can be frustrating if you get turned down for a loan or a mortgage because of your credit history. A credit builder comes in handy if you have been denied credit for the following reasons.
- Lack of Credit History
If you haven’t had time to build up a credit record yet, lenders don’t have any history to gauge your financial capabilities. This happens to a lot of first-time cardholders and individuals who just turned 18. Lenders don’t have much information to help them make a lending decision if there’s no evidence that you have used credit responsibly before.
With a credit builder card, one can rebuild their history and improve the chances of getting approved for loans.
- Past Issues with Credit
A poor credit history from the past could hurt your chances of getting any future loans. Problems such as not paying bills on time, going over the credit card limit, and piling up debts, could have a significant impact on your access to credit. If this is your position, a credit card builder could help you improve your score.
How Do Credit Card Builders Work?
Compared to a typical credit card, these alternatives have a higher annual percentage rate (APR) and lower credit limits. This high APR protects lenders from losing money if you can’t pay them back. In addition, you’ll need to pay a lot of interest on your outstanding balance; therefore, it’s essential to pay off the card in full as required by the digital bank.
A credit card builder doesn’t come with promotional features and rewards on purchases like the standard credit cards.
The card issuer offers a low credit limit that an individual can use to make small purchases. Once you pay off the balance each month, you’ll start looking like a financially responsible individual, and your credit score should improve within four to six months.
How Will the Credit Card Builder Improve Your Credit Score?
The primary reason for getting a credit card builder is to improve your credit score. At first, the score might drop and later improve over time as you manage your finances responsibly.
Here’s how you can improve the score.
- Pay the Credit Card in Full
Every month, you should ensure you meet the repayments in full so that you don’t incur any interest. If you can’t pay up in full, it’s advisable to at least meet the minimum repayment.
This way, your financial credibility will improve. However, if you miss any payments, you could severely affect future loan applications.
- Avoid Late Payments
The digital bank will charge you a fee and reduce your credit limit if you constantly make late payments. Paying on time will boost your score. You can monitor this by setting up text or email alerts to remind you when the next payment is due.
- Stay within the Credit Limit
Digital banks will always provide you with a credit limit. Stay within this limit if you want to look reliable to lending companies. The limit could affect your credit score; hence, it’s best to stay under 25% of the limit to help improve your rating.
How Can You Get A Credit Card Builder from A Digital Bank?
To get a credit card builder, you’ll need to apply to the bank and wait for approval. The bank will determine your credit score based on the information provided on your application form and credit report before deciding to give you a card.
These cards are meant for individuals with low scores, but you first need to confirm eligibility. Some digital banks have an eligibility checker that you can use before applying for a credit builder card. From the results of the eligibility rating, you can get a clear answer whether you have better chances of approval.
If you are planning to apply for a credit builder card, it’s essential to space out your loan applications. This is because every time you apply for credit, lenders will conduct a hard search that gets recorded on your credit report. If you are having credit issues, this will go into your records and could temporarily lower your score and lower your chances of approval.
Credit-builder cards are essential in building a good credit score. They work like any other credit card but have a higher APR and an agreed limit to allow the users to pay for goods and services. It’s best to take these cards for small, essential purchases that you know you can pay back.
These credit-builder cards have a lower application criterion because they are primarily meant for individuals with poor credit scores. Because of this, you are more likely to be approved. These credit builders are a good alternative for students or young people who just turned 18, especially if you don’t have any credit history.
Digital banks have been at the forefront of developing these credit card types for Millenials and Gen Z consumers who are increasingly using credit cards. Because most of them have not had any credit activity, these cards come in handy in building a good financial reputation for future borrowing.
Credit cards from different companies come with their own unique features and additional rewards and cash backs. With digital banking, consumers can access their accounts online or via an app to keep up with the payments.
If you keep up with full card payments, stay within your credit limit and avoid late payments, you can quickly improve your credit score with a credit builder card.