This is new to me. I honestly can’t tell the difference between a so-called “credit builder card” and a conventional debit card linked with a bank account.
Credit Scores Without Debt? Fintech Cards Baffle Credit Industry
Credit-builder cards let users deposit money to pay bills. The fintechs say this counts as borrowing.
By Gina Heeb, The Wall Street Journal, Aug. 28, 2024
Fintechs with names like Chime Financial and Credit Sesame are advertising an unusual perk on some of their products: Customers can boost their credit scores without ever borrowing or paying back any money.
Millions of Americans have opened these so-called credit-builder cards since the first major ones came onto the market around the start of the pandemic. Customers deposit money into these accounts to pay bills or make purchases, much like with a debit card.
Here’s the twist. Fintechs report some of these transactions to the credit-reporting companies as credit activity, or borrowing, even though no credit is ever extended to the customer. …
The business models and terms vary from fintech to fintech. The cards generally don’t charge interest. But they can bring in revenue for the fintechs through interchange or other fees, as well as new customers and data… [end quote]
An article last week described how some fintech companies lose their customers’ money since they aren’t regulated by authorities the way banks are. That’s a separate issue.
I’m puzzled as to why anyone would want to use a “credit builder card” if they are charged a fee instead of a simple debit card. And I can’t understand why using one would impact a credit score since no money is loaned.
Many consumers are not very bright in terms of financial matters. So they fall for the claims made on TV. Why the credit bureaus accept the claims by the “credit building companies” is simple–$$$. I don’t have a credit score because I have used a debit card for decades, not credit. If I was to have a credit score, it would be over 800–because all my bills have been paid on time and in full over a long time period. The only reason many people do not have a credit score is because the reporting agencies ignore debit card and cash payments. But that is their choice, not the choice of anyone else. It also highlights a key weakness in the economic system–failure to account for the loss of sales (and lost economic growth) because people paid cash, and did not use credit.
I understand that technically it is a credit transaction because it is a loan secured against the deposit. However, I agree with you. That seems like a stretch. I don’t understand why the ratings agencies accept this.
Credit cards have lot more consumer protections than debit cards, so it is a good idea to use them preferentially for that reason.
Other than loans, credit scores can affect insurance rates and sometimes even employment. So if you don’t have good credit, it is important to build up the score.
That would put this in the “everything old is new again” category.
Back in the dark ages before there was an internet, there was this thing called a secured credit card. It was a real credit card - had to make monthly payments, charged interest if not paid in full, things like that - but the credit limit was determined by the security you put up. You deposited money in an account, which had some restrictions on withdrawal, and your credit limit on the credit card was the amount of security you put up.
Frankly, that was a much better set of credit card training wheels than this thing - which doesn’t require learning the discipline of monthly payments.
I can see how a “credit builder” card could benefit someone: by seeing if the card holder tries to overdraw the account. If they didn’t try to overdraw the account, repeatedly, that would imply a degree of discipline.
A lot of companies depend on people with iffy credit. I remember one evening, in the fall of 2008, when the local Detroit media was in freak-out mode. GMAC, which GM no longer controlled, decreed they would not finance anyone with a score under 730. iirc, GM’s average customer had a score of something like 680, so, with the stroke of a pen, GM dealers were unable to finance most of their customers.