Good credit is crucial: it can help you rent an apartment, lease a car, and obtain a loan.
But without good credit—or no credit history at all—such services may be out of reach.
That’s where a credit builder card can help, especially if you have less-than-perfect credit or are new to the world of credit altogether.
In this article, we’ll explain how a credit builder card works, who it’s ideal for, and how you can leverage it to increase your credit score.
What is a Credit Builder Card?
Many mainstream credit cards are built for consumers with an established credit history.
As such, they entice users with flashy rewards programs that incentivize constant use. These cards are typically offered by major banks and require a FICO credit score of 700 or higher.
Credit builder cards, on the other hand, are designed specifically for people with a low FICO credit score (between 300 and 670), or even little-to-no credit history.
By offering a lower barrier to entry, credit builder cards empower users to enjoy the many benefits of credit, while actively improving their FICO scores.
Note: FICO scores are used by most U.S. lenders to determine an applicant’s credit risk.
Find a comprehensive guide to the U.S. credit system here.
How Does a Credit Builder Card Work?
A credit builder card works just like other credit cards.
You can make purchases with it online or in-store, and then pay off the balance each month.
Credit builder cards are unique from mainstream cards in two substantive ways: they have higher interest rates and lower credit limits.
For starters, most credit builder cards have higher Annual Percentage Rates (APR) than mainstream credit cards. This feature helps incentivize consumers with credit builder cards to never miss a due date.
After all, the APR is the yearly cost of borrowing on a credit card—the annual interest rate you’ll pay if you carry a revolving balance.
Secondly, credit builder cards often have lower credit limits than mainstream credit cards.
For example, while a mainstream card may allow users to borrow up to $2,000 a month, a credit builder card may provide $1,000.
Higher interest rates and lower credit limits provide consumers with a more focused, manageable pathway to establishing their financial future.
Ultimately, credit builder cards make it possible to eventually access more competitive (and rewarding) credit cards.
Who Are Credit Builder Cards Ideal For?
Everyone can benefit from a credit builder card, from young adults (at least 18 years old), to immigrants, to entrepreneurs.
A credit builder card could be particularly helpful for anyone who is new to credit or is actively seeking to improve their credit.
Additionally, a credit builder card may be very useful if your current credit score, income level, or employment status is preventing you from getting the credit card you want.
If that’s the case, you can use a credit builder card until your financial situation improves, putting you in a position to get the card you need.
A credit builder card may also be useful if you recently immigrated to the United States.
After all, your credit history back home will not be directly transferable to the American economy. Therefore, you will need to restart your credit journey in the U.S. in order to gain access to most loan products.
Finally, a credit builder card could also be helpful if you have struggled with managing debt in the past. By having a lower credit limit, you will position yourself to more consistently make payments on time and steadily increase your FICO score.
Spot the Right Credit Builder Card
A great credit builder card doesn’t need to be your “forever” card. It simply needs to help you establish a better credit score, so you can accomplish the things you value most.
To that end, there are three fundamental questions to consider when selecting a credit-building card.
1. Does It Actually Help Me Build Credit?
While most credit cards empower you to borrow, they don’t all help you build credit.
Make sure you choose a card that reports your monthly payments to each of the three major credit bureaus. After all, building credit requires accountability, and you deserve to be rewarded for your discipline.
2. What Are the Associated Costs and Fees?
Great credit builder cards should have simple and straightforward fees.
And since you’re not paying for luxurious rewards, any origination and annual fees should be in service of your financial freedom. In other words, you shouldn’t have to pay an arm and a leg for a credit card that builds credit.
3. Can I Graduate to a Rewards Card in the Future?
Credit builder cards are a means to an end.
Once your credit is built (or rebuilt), you’ll be in a position to upgrade to a card with more competitive terms (and incentivizing rewards).
3 Tips for Managing Your Credit Builder Card
A credit builder card is a powerful financial tool, and it must be carefully maintained.
Here are five quick tips to help you manage your new credit builder card.
1. Pay Your Bills on Time (Every Time)
Though we may sound like a broken record, it bears repeating: pay your bills on time.
This ranks among the most important things you can do to preserve your financial health and protect (and grow) your credit score.
While paying the monthly minimum is better than not paying at all, aim to pay in full as often as you can. After all, payment history accounts for 35% of your FICO score!
2. Automate Your Payments
Struggling with timely payments? Consider automating the process, so you never have to worry about it again.
Even one late payment could drastically affect your credit score. In fact, most late payments stay on your credit report for up to seven years.
Protect yourself by setting up automated payments as soon as you get your credit builder card.
3. Don’t Get Overextended
While payment history is very important, so is your debt-to-income ratio (DTI)—the percentage of your monthly income that goes toward paying off debts.
If you make $10,000 in pre-tax income a month and owe $4,000 in monthly payments
towards outstanding loans, your DTI would be 40%.
When consumers get overextended, they borrow more than they can confidently repay. According to financial experts, using more than 30% of your total credit limit can negatively affect your credit score.
Borrow responsibly, and avoid maxing out your credit builder card. Your FICO score will thank you.
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