What a Credit Builder Card is, and Why You Need One
Roughly 45 million U.S. adults have no credit score, due to having no credit record or too little of one.
This means that almost 1 in 5 adults are effectively invisible to credit agencies, and that doesn’t even count the number of people with a bad score.
If you’re among that huge number, that means that you’ll have serious trouble taking out new forms of credit, from student loans to mortgages and credit cards. The only way that you can reliably qualify for any of these life-changing (and, for most of us, necessary) credit avenues is to increase your credit score.
That’s why credit builder cards exist!
Building your credit score can be a daunting task, whether you’ve never had one before or you’ve slipped into having a bad score. It’s akin to trying to get a job in a competitive market - you’re effectively told that, to get the job (credit) you want, you need to have already been working there for years. There’s seemingly no way to get that positive experience you need to build your score with traditional means.
Credit Builder cards solve this by providing an easy way to build your credit score without having a massive barrier to entry. This lets you build your score to qualify for bigger commitments, letting you get on with your life without having to worry about money.
In this post we’ll cover:
What is a credit builder card?
How do credit builder cards work?
Who benefits the most from credit builder cards?
Pros and cons of most credit builder cards
The best credit builder card you can get
Let’s get started.
What is a credit builder card?
A credit builder card is pretty much what it says on the can - a credit card specifically designed to help you build your credit score.
To facilitate this, these cards differ slightly from regular credit cards, usually in the amount of money you can owe on the card at maximum (the credit limit) and how much you’ll have to pay extra to clear any charges (interest/APR). However, this is far from a drawback.
We here at Grow Credit have gone into the details of how credit works, what affects it, how to recover from a bad score and how to improve it in general. To sum it up, the two aspects that make credit builder cards unique (that being their low limit and high APR) are there to make them easier to access, and to make it a priority of those who have them to do everything they need to build their credit score.
How do credit builder cards work?
While we can’t go into the specifics of how each credit builder card works (not without writing an entire book on the topic), it’s easy to get the gist of them.
The low credit limit means that lenders are more amenable to giving you the card in the first place. This is because you can borrow a much smaller amount before having to pay it off, reducing the risk on their end of losing a large sum of money.
Being able to spend less money also means that you’re less tempted to do so when you can’t afford to pay it back.
Similarly, the high APR of most credit builder cards makes it especially important to pay off any credit you use as soon as possible. The longer you leave it, the more it’ll quickly snowball into a figure that you can’t manage.
This covers many of the elements vital to building your credit score:
It provides you with a credit history
It gives you a new kind of credit on your history (if you don’t already have a credit card)
You’re incentivized to use very little of your available credit
It encourages you to avoid any late payments
As such, let’s move on to examine...
Who benefits the most from credit builder cards?
You’ll benefit the most from having a credit builder card if you either don’t have a credit score yet or you have a bad score.
The idea behind credit builder cards isn’t really to allow you to spend a lot of money on credit. Similarly, because they’re designed for people to build their credit score, the lower your score before getting one the more you stand to gain from increasing it.
That’s also why many credit builder cards have lower requirements to become eligible for them than traditional credit cards. Those who don’t already have a good (or at least average) credit score can struggle to get a traditional card, which can make it difficult to grow your credit score at all.
If you already have a bad score, many lenders won’t consider you eligible for most loans, credit cards, and so on. As such, credit builder cards are not only a good option for those with a bad credit score - they might be your only option to start rebuilding it.
Pros and cons of most credit builder cards
Let’s summarise the pros and cons of credit builder cards in general. Remember that these aren’t hard and fast rules for every card - this is a list to show what their general appeal and uses are, and what to be wary of before taking one out.
Pros
Source by Filip Filipović, used under Pixabay license
1. It’s an easy way to improve your credit score
Credit builder cards are an excellent way to improve your credit score, as you’d hope from something which is specifically designed to do so. Their small credit limit means that you’re less likely to borrow what you can’t afford to pay back, and high APR encourages you to avoid any late repayments due to said repayments being more expensive than a traditional credit card.
In other words, they’re a fantastic way to start rebuilding your credit if you currently have a bad score, and a great introduction to growing your score if you’ve never had one before.
2. You’re more likely to be accepted for a builder card
As stated earlier, traditional credit cards can be a nightmare to gain access to if you have a low (or no) credit score. That’s why credit builder cards are a great alternative!
Their lower limits and higher APR mean that they’re more attractive options for lenders who are looking to reduce the risk involved. Which is, you know, kind of the whole point of having a credit score in the first place - to show lenders that they can count on you to make repayments.
3. It incentivizes everything you need to build your score
Once again, credit builder cards are fantastic for building the habits you need to get into in order to reliably build your credit score.
Generally speaking, you want to have available credit (of which you’re not using much), own a variety of credit, have a long credit history, and have no missed or late payments. All of these are encouraged or outright enforced by builder cards.
Cons
Source by Darko Djurin, used under Pixabay license
1. Credit builder cards have low credit limits
This is more of a disadvantage if you’re looking for a traditional credit card, but credit builder cards have much lower limits on what you can spend before paying them off.
Typically you want to avoid spending much of your credit limit anyway, especially if you don’t have a steady income that allows you to splash out without paying the money back quickly However, it’s still worth noting that builder cards don’t even give you the option - if you’re not keeping a close eye on your limit, it’s easy to max out your card.
2. APRs are much higher than traditional credit cards
Any money you borrow on a credit builder card is subject to much higher APRs than usual. This means that you’ll have to pay back much more in interest than on a traditional card.
Once again this is more of a situational disadvantage, as it shouldn’t affect your payments much as long as you keep a close eye on what you spend. The quicker you pay back what you spend on credit, the interest payments won’t be too bad.
3. Any credit you can’t afford is a bad idea
The biggest drawback to credit builder cards is the same for any credit card, or really any form of credit or spending in general. If you aren’t careful with your budgeting you still run the risk of building up debt which you might not be able to afford to pay back.
No matter how a card is set out, there is always the potential to abuse it (or to simply lose track of your spending) and lower your credit score as a result. Don’t make any commitments which you can’t keep.
4. Applying to obtain a builder card will leave a hard credit check on your history
Having multiple hard credit checks (checks for taking out most forms of new credit) in your recent history is a one-way ticket to a lower credit score. As such you need to avoid taking on too many forms of new credit in a short period of time.
This is worth considering if you’ve recently taken out a new credit card or loan, be it student, auto, or a full-on mortgage. If that’s the case, you’ll want to wait until those hard checks have been wiped off your credit history before looking into taking out a builder card.
The best credit builder card you can get
Grow Credit is one of the easiest to obtain and most reliable credit builder cards on the market.
While that’s a big claim, we have plenty of reasons to back us up.
1. There is no hard credit check
First up, with Grow Credit there is no hard credit check in order to be eligible for our card. That means that you can get it no matter what your credit score is.
Not only that, but the lack of a hard credit check means that you don’t have to wait in order to apply. Even if you’ve recently taken out a loan or a traditional credit card, you can apply for a Grow Credit card without any fear of lowering your credit score further.
2. There’s no interest or APR
Grow credit doesn’t have any interest, APR or hidden fees on your spending. In other words, no matter what you spend, you don’t have to worry about racking up massive interest payments.
As a bonus, there is zero cost associated with closing your account! This means that, unlike the Self Visa credit card for example, you don’t have to worry about losing money if you decide to close out.
3. You can’t spend your credit on traditional purchases
Another great aspect of the Grow Credit card is that there is no risk whatsoever of overspending due to a misjudgment or overzealous shopping spree. That’s because the Grow Credit card only lets you spend money on your subscription services.
This makes it incredibly easy to both make your repayments and keep track of exactly what you spend. Simply log your subscriptions with Grow Credit, let them draw from your account, and set up a direct debit to pay off whatever your monthly costs are.
You barely even have to think about growing your credit score with Grow Credit!
4. It makes it easy to manage your monthly subscriptions
Subscription services are easy to lose track of. I’ve often checked my bank statements only to realize that I’ve been paying through the nose for services I no longer use or even remembered signing up for.
This is an especially large problem since so many streaming services have popped up, carving up your favorite content across multiple paid services. Whether you’re paying for just Netflix or everything from Disney+ to HBO Max, it’s easy to see exactly what you’re signed up for and precisely how much you’ve spending on these services each and every month with Grow Credit.
Stop losing track of your repayments and falling prey to predatory interest rates. Sign up for a Grow Credit card today.