How Credit-Builder Cards Let Customers Boost Their Score Without Debt
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Here's your Money Briefing for Friday, August 30th. I'm J.R. Whelan for The Wall Street Journal. Paying your credit card bills on time can boost your credit score, which often is a key to whether you get a loan or even if a landlord will rent you an apartment. But what if there was an easier way to raise your score? That's where fintech products called credit builder cards come in.
The big twist with these kinds of cards is that the customer does not actually borrow or pay any money back like with a normal credit card. They actually operate a lot like a debit card where a customer just buys something and on the back end it's reflected as credit.
We'll talk to Wall Street Journal reporter Gina Hebe after the break.
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So-called credit builder cards offered by fintech companies like Chime Financial and Credit Sesame advertise that they can help consumers boost their credit score. Wall Street Journal banking reporter Gina Hebe joins me. Gina, how do these cards differ from traditional credit cards?
The big twist with these kinds of cards is that the customer does not actually borrow or pay any money back like with a normal credit card. They actually operate a lot like a debit card where a customer just buys something and on the back end it's reflected as credit.
Is it tied to a bank account?
These come through fintechs that often partner with banks to make these transactions happen.
How does the way people use these credit building cards boost their credit score?
So they all operate a little bit differently. It's quite fragmented at the moment, meaning there are a number of different companies. For some of them, it's just taking utility bills, your electric bill or your cable bill and reporting those monthly payments as credit. For others, it's a little bit more what some would describe as gaming the system, where you're depositing a certain amount of money into these fintech accounts and you're actually choosing your utilization. And on the back end, it's just being reported as credit.
So when somebody uses a credit builder card, how does the cash flow differ from when they might use a traditional credit card?
With a traditional credit card, the whole point of it is to give a consumer access to money that they otherwise might not have.
How do credit-builder cards differ from traditional credit cards?
So that money is coming, you know, from a bank that's lending it. With these credit builder cards, often it is working like a debit card, meaning that the money is actually coming from the consumer themselves.
In your reporting, you write that this system has come under scrutiny. Why is it drawing criticism?
For decades, credit scores have very much had one purpose, and that is to predict willingness and ability that a consumer is going to repay a loan. And this is used in all sorts of situations beyond, you know, getting a credit card. It's also used in determining whether an applicant for an apartment will get that apartment, whether a candidate for a job will get that job. And with these sorts of cards, there is no loan being taken out and it's still affecting that score.
So it's very different from the process with a traditional credit card. But does it run afoul of any banking regulations?
Regulators haven't said a ton about these products yet, because remember, they're not administered by banks themselves. It's fintechs often working with banks.
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