Whats a Credit Builder Card: Everything You Need to Know

A credit builder card is a type of secured credit card that is designed to help people build or rebuild their credit score. It allows people with poor or no credit history to demonstrate responsible credit behavior and improve their credit profile over time.

How Does a Credit Builder Card Work?

A credit builder card works a bit differently from a regular unsecured credit card

• You make a refundable security deposit to open the account. This deposit typically becomes your credit limit.

• The security deposit shows the card issuer you have funds to make payments if needed It reduces their risk in extending you credit

• You use the card just like a regular credit card, making purchases and payments. The deposit is not used to pay your balance.

• You build credit history by making on-time payments This activity gets reported to the major credit bureaus

• After you build good credit, you may qualify to graduate to an unsecured card. At that point or when closing the account in good standing, you get your deposit back.

What Are the Benefits of a Credit Builder Card?

There are several advantages to using a credit builder card responsibly:

• Get approved despite poor credit or no credit history. The security deposit makes approval easier.

• Establish credit history and build credit from the ground up. Making on-time payments helps improve your credit score.

• Use it just like a regular credit card for purchases and payments. But you have the security deposit as a backup source of payment if needed.

• Graduate to an unsecured card in the future. Credit builder cards help qualify for unsecured credit after demonstrating responsible behavior.

• Access your security deposit again after closing the account in good standing or graduating to an unsecured card.

• Avoid alternative lending sources with less favorable terms. Credit builder cards provide access to major card network benefits.

• Receive monitoring and reporting. Many credit builder cards offer access credit score tracking and report updates.

Who Should Get a Credit Builder Card?

Credit builder cards cater to specific consumer groups who can benefit from building credit history:

• New credit users – Those with no prior credit history can start building a credit file. Credit builders allow establishing positive history.

• Credit repairers – After setbacks like bankruptcy or collections, credit builder cards offer a chance to demonstrate responsible use.

• Recent immigrants – Individuals who arrive in a new country without local credit history can gain traction with a credit builder.

• Students – A student credit builder card presents an opportunity to establish credit early on. Interest rates may be lower compared to retail cards.

• Authorized users – Someone added as an authorized user on another person’s card can build independent history with a credit builder.

• Reluctant applicants – Consumers hesitant about credit risk can gain experience using a secured card with a deposit buffer as protection.

How to Get a Credit Builder Card

Applying for a credit builder card involves a few simple steps:

• Check eligibility requirements for the card, like minimum security deposit amounts. Compare options from issuers like banks and credit unions.

• Submit an application providing personal details and choice of deposit up to the allowed maximum for that card. Approval is likely with a security deposit.

• Get approved and open the secured account. The deposit becomes your credit limit. Activate the card when received.

• Use the card to make purchases while paying the monthly balances on time and as agreed. Card activity gets reported to the credit bureaus.

• Build credit history month-by-month through responsible card usage and diligent payments. Monitor your credit report and score.

• After establishing good payment activity for an adequate time period, request to graduate to an unsecured card or apply for one with another issuer.

Tips for Using a Credit Builder Card

To maximize the benefits of a credit builder, be sure to follow these tips:

• Make payments in full and on time – Payment history is typically the biggest factor in credit scores. Never miss payments.

• Keep utilization low – Using less than 30% of your limit monthly helps credit building. High balances can negatively impact scores.

• Use the card lightly at first – Start with small initial charges as you get used to making payments. Slow and steady card use can benefit building credit.

• Pay down extra when possible – Making payments above the minimum due helps keep balances low for better credit effects.

• Review statements closely – Check statements to ensure all charges are legitimate and there are no fraudulent transactions. Report any discrepancies.

• Do not overspend – Stick to affordable purchases that you can pay off completely each month. Avoid charging more than you can comfortably repay.

• Check your credit reports – Review your credit reports periodically to ensure your card payments are registering in your credit history.

• Be patient – Credit building takes time. Expect to put in around 6 months to a year before seeing significant positive impacts.

Graduating to an Unsecured Card

Once you demonstrate a history of on-time payments and responsible credit management, you can take steps to graduate from your secured credit builder card:

• After about 1 year of consistent payments, request your issuer convert your credit builder to an unsecured card.

• If declined for conversion, apply for a new unsecured card with the same issuer or another, noting your payment history.

• Get approved for the new unsecured card, then close your credit builder card account in good standing. You get your security deposit back provided your balance is paid.

• Going forward, use your new unsecured card wisely to continue strengthening your credit. Your credit limit will now be set based on your creditworthiness rather than a deposit.

Alternatives to Credit Builder Cards

Credit builder cards offer a solid path to establishing credit, but there are other options to consider as well:

• Secured loans – Taking out and repaying a small loan responsibly also builds credit through on-time payments.

• Retail store cards – Department store cards aimed at subprime borrowers can help start a credit history when managed prudently.

• Become an authorized user – Getting added as an authorized user on another cardholder’s account lets you build credit history piggyback-style.

• Credit-builder loans – Some credit unions offer loans to establish credit, with payments going into a savings account you access later.

• Prepaid debit cards – Certain reloadable prepaid cards offer the optional feature of credit reporting, helping build credit.

• Student credit cards – Student cards typically have lower requirements than other unsecured cards, providing a potential alternative.

The Bottom Line

Credit builder cards provide a useful tool for establishing and strengthening credit. They allow the opportunity to demonstrate responsible usage and payments, which get reported to the credit bureaus. Using a credit builder card strategically and transitioning to unsecured credit at the right time enables building solid credit history. With this foundation, you gain access to more credit products and better loan terms in the future.