June 9, 2023
Some Credit Cards Actually Help You Improve Your Credit. Here’s How

Some Credit Cards Actually Help You Improve Your Credit. Here’s How

But consumers who have poor or limited credit or are new to credit often face high interest rates and fees, security deposits, low credit limits, and other limiting features.

Fortunately, options have improved recently. Alternative credit cards, particularly cards that act as a debit-credit hybrid, have proliferated because they remove some of the hurdles that come with traditional credit cards for bad or limited credit, making it easier to build credit.

How Alternative Credit Cards Work

There are a number of alternative credit cards on the market that consumers can use to build credit. “They are amazing starter credit cards that can help them repair their credit or build it,” says John Taylor Garner, founder and CEO of Odynn, a credit card rewards optimization platform.

These cards typically function as a hybrid between a credit and a debit card. Instead of giving you a credit limit, for instance, the card issuer may automatically deduct payment from your checking account for transactions you make – similar to how traditional debit cards work.

Alternatively, the card issuer may require that you load money onto your account as you would a prepaid debit card. In this case, you can only spend what’s on your account. If you want to spend more, you simply add more money to the account.

Some of the hallmarks of these alternative credit cards include the following:

  • No credit check. Because you’re not technically getting a line of credit, the card issuer likely won’t run a credit check when you apply. As a result, you may have good approval odds, even if you have poor or limited credit. That said, the card issuer may review your income and expenses to determine your eligibility and require a linked bank account to fund the card.
  • No security deposit. Because your card is tied to a checking account or a prepaid account and there’s no line of credit to secure, you don’t have to worry about providing an upfront security deposit.
  • No preset limit. Similar to charge cards, these cards usually don’t have a preset spending limit. However, some may limit how much you can load onto your account and spend each month.
  • No interest charges or way to take on debt. Because these cards often take payments automatically, you can’t spend more than you have. What’s more, you won’t pay interest because your balance is always paid in full. If the card pulls payments from your checking account, though, you may incur overdraft or returned payment fees from your bank if your balance is too low.
  • Low on fees. Alternative credit cards often skip the annual fee that’s common with credit cards designed for people with poor or limited credit. But keep an eye out for annual, or even monthly, fees as you shop around.
  • Reports to the credit bureaus. Each month, alternative credit card issuers will report your balance and payment information to the national credit reporting agencies, helping you build your credit history. As you shop around, though, confirm the card issuer reports to all three credit bureaus – if it only reports to one or two, it could limit your efforts.
  • Rewards. Some alternative credit cards offer rewards. In fact, the rewards can be just as good as those from a traditional rewards credit card.

Alternative Credit Cards to Consider

Here are some of the top alternative credit cards currently available, with the features they provide:

What to Consider Before Applying for an Alternative Credit Card

  • Your bank may not be supported. If the card issuer requires you to link your bank account during the application process, you may run into an issue if your account is with a lesser-known community bank or local credit union that isn’t supported.
  • The issuer may not report to all three credit bureaus. “One of the most important things to keep in mind when considering these types of credit cards is that they actually help you build credit by reporting to all three major credit bureaus,” says Garner. If a card doesn’t report to all three, your credit history won’t be complete across all three of your credit reports.
  • Certain benefits may change. For example, the Tomo card initially offered 1% cash back on every purchase but nixed that benefit later on. 

“There are concerns about the sustainability of alternative credit cards and their rewards and benefits,” says Latham. “However, this is nothing different from traditional credit cards which may start with a generous rewards rate and then change it. Both traditional and alternative cards can change their benefits or fees over time.”
Latham recommends staying informed and reviewing the terms and conditions regularly to ensure the card remains a good fit for your financial needs over time.

Is an Alternative Credit Card Right for You?

If you’re hoping to establish your credit history or rebuild a poor credit score, alternative credit cards can be a better fit than a traditional secured or unsecured credit card for bad credit. Not only can you avoid a credit check, but you also don’t have to worry about interest charges.

What’s more, your spending power is generally determined by how much money you actually have to spend rather than your security deposit or a credit inquiry. In some cases, you can also earn rewards, which aren’t available on many credit cards designed for poor or limited credit.

Even if you have good credit, an alternative credit card could be a good fit. “Alternative credit cards that make it impossible to get into debt and don’t charge interest can be a huge benefit for people who struggle with overspending or prefer to avoid traditional credit cards,” says Latham. “These cards can help individuals establish good credit habits and build credit without the risk of falling into debt.”

As you consider your financial situation and goals, think carefully about all of your options to determine the best credit card for you.

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