For those wondering how to build credit with no prior history, one possible answer to this conundrum is to apply for a credit builder credit card.
What is a Credit Builder Card?
Also known as a secured credit card, a credit builder card is a type of credit card that is backed by cash deposits. With a secured credit card, your credit limit is determined by the amount of money that you put on the card. The cash that you deposit serves as collateral in the event that you are not able to make your payments on time.
You can use secured credit cards for rebuilding credit, if you have a poor credit history, or to build credit if you simply have no credit record. If you don’t qualify for a traditional unsecured card, then a credit builder credit card may be a good choice for you.
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How Does it Work?
There are two main types of credit cards: unsecured and secured. The vast majority of credit cards are unsecured, which means that there’s no collateral or cash that guarantees your ability to pay off your debt. Since there’s nothing to secure your debt, these cards normally come with high interest rates and fees and feature flexible spending limits. While they may offer certain rewards or benefits as perks when you use the card, they often require you to have good or excellent credit in order to qualify.
Meanwhile, credit builder cards are secured with cash deposits. In other words, the amount you can spend using your card is limited by the amount of cash you deposit into your credit card deposit account.
That said, some cards do not require you to maintain a minimum deposit balance on your card and may offer a spending limit greater than the amount of your qualifying deposits. For example, while one company may provide a $200 spending limit on a $200 deposit, another may offer a $400 spending limit on the same deposit.
Once you make your initial or qualifying deposit, secured cards tend to work the same way as unsecured cards in that you can use them for purchases in store or online and pay back the debt at a later time. Depending on the company you choose, you may earn interest on your deposits if you keep a positive cash balance on your card from month to month. Just remember that you’ll want to make your payments on time in order to avoid paying interest or penalties. Making timely payments is one of the most important good credit habits you can develop.
Is a Credit Builder Card Right for You?
Think of credit builder credit cards as credit cards for beginners. They will help you if you have no credit history and wouldn’t normally qualify for an unsecured credit card or loan. Students and immigrants are two of the groups that might consider a credit builder card, as they may lack a verifiable credit history.
You may also want to use credit builder cards if you have poor credit and want to rebuild. Understanding the common reasons for credit card denial can clarify why a secured card is a better fit for you right now, since most secured credit cards have no or low credit score requirements. By securing your spending with qualifying deposits, secured cards enable you to slowly build credit while exposing you to less risk than unsecured cards that allow you to take on more debt than you are able to repay.
When comparing credit builder cards, you’ll want to look for cards that offer you the highest spending limit and the most benefits with the lowest interest rates and fees. Some secured cards charge high interest rates if you fail to make your payments on time, and the companies may also charge maintenance or overdraft protection fees if applicable. An annual fee is another common cost, but many excellent no annual fee credit cards are available, including some secured options.
On the other hand, some cards charge no fees or interest rates, and some offer features that enable you to automate and track your spending so that you never spend more than what you are able to pay back on time.
Pros and Cons of Credit Builder Cards
Pros:
- Help you establish or rebuild your credit score
- Usually easier to qualify for than unsecured cards
Cons:
- Lower spending limits than most unsecured cards
- Can be difficult to meet initial qualifying deposit requirements
Summary
A credit builder credit card is a secured card backed by a cash deposit. With a secured card, you can rebuild a poor credit score or even build credit if you have no credit. Compared to unsecured cards, credit builder credit cards tend to have easier application requirements. While some charge high fees and interest rates, others charge low or no fees and feature refundable deposits and competitive APRs.
If you want to build credit but aren't yet able to qualify for an unsecured card, a credit builder credit card may be the right choice for you. It's a tool designed to help you reach the next level, where you can begin to compare options like the Apple Card and other competitors and choose a card with more robust features.
