WSJ Your Money Briefing - How Credit-Builder Cards Let Customers Boost Their Score Without Debt

Episode Date: August 30, 2024

Credit-builder cards from companies like Chime Financial and Credit Sesame are promising customers a higher credit score without ever borrowing or paying back any money. Wall Street Journal reporter Gina Heeb joins host J.R. Whalen to discuss how these cards work.  Sign up for the WSJ's free Markets A.M. newsletter.  Learn more about your ad choices. Visit megaphone.fm/adchoices

When your celebration of life is prepaid in advance, it becomes a gift from you to your family later, because no one should have to plan for a loss while they're experiencing one. Paying in advance protects your loved ones and gives you the peace of mind you deserve. Let us help you plan every detail with professionalism and compassion. We are your local Dignity Memorial provider. Find us at DignityMemorial.ca. Here's your money briefing for Friday, August 30th. I'm JR Whalen 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 Heave after the break. Introducing TD Insurance for Business with customized coverage options for your business. Because at TD Insurance, we understand that your business is unique, so your business insurance should be too.

Whether you're a shop owner, a pet groomer, a contractor, or a consultant, you can get customized coverage for your business. Contact a licensed TD Insurance Advisor to learn more. 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 someone described 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 the traditional credit card, the whole point of it is to give a consumer access to money that they otherwise might not have. So that money is coming 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 drawn 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 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, but we do know that regulators have been taking

a deeper look at fintechs in general and how they partner with banks. So I guess that could change. If somebody misses a payment and they're using a traditional credit card, their credit score may go down. Could their credit score go down through the use of the credit building card? A lot of these fintechs, the very point is to make it almost impossible for that to happen. With that said, I have found cases where a missed payment can be reported to bureaus. It's just in general, they make it a lot harder than your traditional bank credit card.

You spoke to several people who've used the credit building cards. How has it worked out for them? So I heard mixed reviews on this. People did see scores go up, at least initially, which is great. And what is advertised here, one of the big critiques or questions I got from consumers is that it's very hard to tell exactly what drives those moves. And that goes along with something that's being scrutinized in the broader credit industry

right now when it comes to traditional scores. There's a number of different factors that are going into every credit score move. So it's almost impossible for a consumer to look at a certain score movement and know exactly where it's coming from. What's the allure of the credit building cards? What are they promising consumers? A lot of people say that with traditional credit scores, a lot of people get locked out of the system or they can't access it cheaply.

They have to pay high interest rates. One of the funny things about traditional credit scores is that you often need a good credit score to get a credit card, but you need a credit card to get a good credit score. So expanding access and improving scores for people who just moved to this country or have just turned 18. That is the promise that they're trying to sell. What are the risks of someone's credit score not accurately reflecting the broad picture of their track record of borrowing or paying money back? One of the big risks is that this might pump up credit scores in a way that doesn't accurately

reflect consumer behavior. And the risk of that for the consumer is that they could get in over their head, get access to credit lines that maybe they shouldn't have, that they could fall behind on payments. For the banks, the main reason they use predictive models like this is because they want to get paid back. So if scores are inflated in a sense, then they could run into trouble. If someone's considering using a credit building card, what questions should they ask? What should they look for in their own personal finances before they do it?

As with any new financial product, someone should do a lot of research into the fine print of these cards. Some of them do charge monthly fees or make fees through interchange. Not all of them are completely free. And some of them while they do make it a lot harder to have negative credit activity reported, it's still possible. It's not completely without risk. That's WSJ reporter Gina Hebe. And that's it for your money briefing. We'll be off on Monday for Labor Day, but we'll be back Tuesday morning with a new episode of Your Money Briefing.

Today's show was produced by Ariana Asparu. I'm your host, JR Whalen. Jessica Fenton and Michael LaValle wrote our theme music. Our supervising producer is Melanie Roy. Aisha Al-Muslim is our development producer. Scott Salloway and Chris Zinsley are our deputy editors. And Falana Patterson is the Wall Street Journal's head of news audio.

Thanks for listening. ["The Daily Show"]